The Summary of Opinions from the July 30-31 BOJ meeting, released this week, was materially more hawkish than the headline decision suggests. While only one of the nine board members voted for a rate hike, at least three expressed explicit concerns about upside inflation risks and argued that the pace of rate hikes could be accelerated.
From an economic fundamental perspective, there are growing reasons for the BOJ to bring forward its tightening cycle. Wage-driven reflation and the domestic recovery remain firm. Base wage growth has held at around 3% yoy for six consecutive months, while CPI excluding fresh food, energy and institutional factors has remained around 2% for six months. July’s Tokyo CPI also indicated that underlying inflation momentum has begun to strengthen again over the summer, reinforcing the case for further policy normalization.
From a financial market perspective, faster policy normalization may also be needed to address persistent JPY weakness. The Ministry of Finance is estimated to have spent around JPY15tn on yen-buying intervention on July 30-31, while the US Treasury also participated in the joint intervention on July 31. USD/JPY fell from around 163 on July 29 to 157 on July 31 but subsequently rebounded to around 159 by August 10. There may be only one more opportunity for intervention before November, given the IMF’s reference framework, under which official FX intervention for free-floating currencies should not exceed three times within a six-month period.
However, an early September hike would need to be managed carefully. Markets have not yet fully priced a September move. If the BOJ hikes in September, it would mark the first time since 1989-90 that the Bank has raised rates once every three months. Such a move could materially shift market expectations for both the pace and terminal level of the tightening cycle, potentially triggering a significant unwinding of JPY carry trades — particularly if the Sep 15-16 FOMC meeting does not provide a clear signal of Fed tightening.
We have pencilled in a BOJ policy rate hike to 1.25% in October, while currently assigning a nearly 50% probability to an earlier move at the September 17-18 meeting. In the coming weeks, the key factors to watch will be the July/August wage and CPI data, USD/JPY dynamics, BOJ officials’ speeches, and the outcome of the Sep 15-16 FOMC meeting.
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