BoJ Preview: Little Cues Expected

The BoJ will keep rates unchanged at 0.5% in the June meeting with little forward guidance on ongoing uncertainty between the U.S. and Japan trade front. Inflation remain well above 3% and has shown little sign for underlying inflation to cool. The latest release of rice reserve may see headline inflation to be contained for the time being. Yet, the momentum of underlying inflationary pressure and the changes in business price/wage setting behavior will be supportive for a BoJ move, once the trade conflict with the U.S. is solved.

The remark from Japanese PM Ishida on Monday has poured cool water on expectation of a trade deal to be reached soon. Trump also seems to be distracted by the geopolitical tension between Israel and Iran by departing the G7 summit early. The BoJ is likely going to downplay the inflation figure with transitory factor again and give no cues on forward guidance. However, market participants are expecting the BoJ to further reveal their plans in bond purchase tapering with a consensus of 200 billion after June 2026.

Our central forecast sees the BoJ to hike by 25bps in the September meeting if a trade deal is to be reached before. They will likely suggest more tightening to come if economic development is favorable. Still, the terminal rate is likely to be 1% as we forecast the mid term inflation outlook to be treading lower.