So the Bank of Japan kept their policy rate at 0.5% at their July meeting, and this was very much expected. Today's meeting was really all about the messaging in terms of where rates are going from here. Now, on the hawkish side, we heard from the Bank of Japan that trade uncertainty has reduced now that Japan and the U.S. have come to a trade agreement, and that had hitherto been a key factor behind the Bank of Japan pausing their increase in rates trajectory.
A second, more hawkish factor is that the Bank of Japan actually outlined what looks like really quite a resilient and robust Japanese macro economy. They revised up their view for GDP. They revised up their view for inflation, particularly for this year on the back of higher food prices. They see private consumption recovering. So really an economy that is quite resilient and could likely withstand higher interest rates from here.
Having said all that, we think on balance there are more dovish factors that are weighing on the Bank of Japan's mind. The first is that even though trade uncertainty may be reduced, it hasn't gone away. They still don't know what is the likely impact of the U.S.-Japan trade agreement on things like corporate profit margins and therefore wage growth, and hence the sustainability of inflation at the 2% target.
They also have an assessment that underlying inflation is actually decelerating. Headline inflation is higher on the back of food prices. But underlying domestic momentum for inflation is decelerating, putting at risk the sustainability of achieving their inflation target. And finally, the Bank of Japan see the Japanese economy evolving in two stages with a near-term slowdown before a recovery further out.
So these three things to us suggest that the Bank of Japan are really in no hurry to hike. We continue to see, despite the fact that the U.S. and Japan have now come to a trade agreement, that the Bank of Japan will keep those rates on hold at 0.5% for the remainder of this year, and only look to raising interest rates in the early part of 2026.
