BoJ Preview: Inflation forecast higher

The BoJ will keep rates unchanged at 0.5% in the July 31st meeting with a small chance to change forward guidance. After reaching a trade agreement with the U.S., BoJ's hands are now untied for rate changes and we forecast a 25bps hike to be announced in the September meeting. In the July 31st meeting, the BoJ did not have enough time to assess the outcome of the trade deal as details are still lacking, not to mention the deal has to be approved by the now lame duck parliament. 

It is widely expected for the BoJ to revised their inflation forecast higher. We expect both ex fresh food and ex fresh food & energy to be revised closer to 3% for fiscal 2025, above 2% for fiscal 2026/27. It will be more hawkish than most market participants' anticipation if we see both item to be above 3% in 2025 and above 2.5% in 2026/27. The GDP forecast will be up for further revision as tariff impact remain unclear. 

While we do not expect a change in forward guidance, they are chances that in Ueda's post meeting communication he will indicate the likelihood of BoJ hiking rates to be higher after the U.S.-Japan trade deal. And with CPI sustainably above 2%, market pricing for rate may change significantly as they are not pricing in any hikes for 2025. We believe the BoJ will hike by 25bps in the September meeting as they could not further attribute the rising inflationary pressure toward transitory factors. It would come as a surprise if they decide to hike in the July meeting and show the market they are more concern about the inflationary pressure than they express.