BoJ Review: Holding the lines

The BoJ has kept rates unchanged at 0.5% in the September 19th meeting with two votes of dissent. It came as no surprise for the BoJ as there is current political uncertainty until the October 4 LDP election. However, current inflationary dynamics are supportive and the clarity from the U.S.-Japan trade front seems to have free the BoJ's hand for some indirect tightening. They have announced the "disposal" of ETFs and J-REIT at approximately 0.05% of trading values in the market or equivalent to "stocks purchased from financial institution". While the beginning date is to be announced, it is the first change to BoJ's holding of ETFs and J-REITs since the March 2024 meeting. While it is not as direct tightening as selling JGB, it is still a kind of shrinking of the bank's balance sheet and drains some liquidity. 

Additionally, they have set three principle in selling these asset. They will sell these asset for "adequate prices", avoid incurring losses as much as possible and without disrupting the financial market. They also kept the doors opened by suggesting such pace and magnitude could change in future meeting if the sale did not go well.

There does not seem to be much changes in the bank's rhetoric, in terms of economic development and inflation. BoJ seems to be downplaying headline inflation and attribute the stubborn underlying inflationary figure to long term structural labor shortage. They are seeing such to reach their inflation target in the second part of economic outlook, which is late 2026.

We continue to see an October rate hike of 25bps as inflationary dynamics are supportive and any trade/political uncertainty will mostly dissipate.