BoJ Review: As expected

The BoJ has kept rates unchanged at 0.5% in the July 31st meeting with inflation forecast revised higher. It came as no surprise for the BoJ needs more time to assess the impact of tariffs after the trade agreement between the U.S. and Japan being reached. Inflation forecast are all revised higher, with ex fresh food CPI for fiscal 2025 rising to 2.7% from 2.2% and ex fresh food & energy to 2.8% from 2.3%. It clearly suggest underlying inflation is more than transitory and looks set for an imminent hike. However, for 2026 neither core (1.8%) /core-core (1.9%) are above 2% after revision, showing the magnitude of hikes will be conservative. In 2027, the BoJ sees both items to be at 2%, further rationalizing their idea that inflation target is now sustainably. reached.

The growth forecast is little changed, being moderate in BoJ's eyes and potentially picking up momentum after 2027. However, they fear such outlook will have a downside skew due to trade uncertainty. It is understandable despite a trade agreement is reached to reduce tariffs, details are still lacking. One of the concern BoJ has is the pace of wage growth amid uncertainty, where we saw slowed to around 2% in the past months. 

The rhetoric of "Will continue to raise policy rate if economy and prices move in line with forecast, in accordance with improvements in economy and prices" did not change. We forecast a 25bps hike in the September meeting before a terminal rate of 1% before Q1 2026.