ING analysts Chris Turner and Padhraic Garvey project that the Bank of Japan (BoJ) is likely to implement a 25 basis point rate hike, raising the policy rate to 1.25%, and then proceed with a cautious approach to further tightening. They anticipate two additional 25bp hikes in January and April, which would bring the policy rate to 1.75%, a level they consider near-neutral ahead of a planned temporary consumption tax cut on food and non-alcoholic beverages from 8% to 1% in April, lasting for two years [1].
The BoJ has formally communicated that the real policy rate remains negative and needs to be raised, with discussions around a neutral rate ranging from 1.1% to 2.5% in nominal terms. ING analysts believe the BoJ is unlikely to leave the policy rate unchanged at 1.00%, and while a 50bp hike is a marginal risk, it could be considered as part of a broader agreement with Washington to sustainably lower USD/JPY, reduce the need for large-scale dollar selling intervention, and stabilize Japanese Government Bonds (JGBs) [1].
However, the Japanese government's aggressive pro-growth strategy is expected to limit the pace of tightening, with officials likely to resist a faster cycle such as a 50bp hike in September or consecutive hikes in September and October. ING's base case remains for a gradual path, with the policy rate reaching 1.75% by April 2025 [1].
The BoJ's narrative has shifted towards inflation being on a sustainable path, with a focus on the transmission of higher input and producer prices into broader consumer price inflation. The latest Tankan business survey indicated a sharp rise in output price expectations, and the BoJ is closely monitoring the 7% year-on-year growth in corporate goods prices [1].
CONCLUSION
The Bank of Japan is expected to pursue a gradual path toward a neutral policy rate, with ING forecasting a series of 25bp hikes to 1.75% by April. Government resistance to aggressive tightening and a forthcoming consumption tax cut are likely to shape the BoJ's cautious approach. Market participants should watch for further signals from both the BoJ and government regarding the pace of normalization.