The Bank of Japan (BOJ) is expected to announce plans to taper its extensive bond-buying program and discuss a potential interest rate hike on Wednesday, signalling a shift away from a decade of substantial monetary stimulus.
As the U.S. Federal Reserve hints at a possible interest rate cut by September, the BOJ’s two-day meeting will conclude with a decision on reducing monthly bond purchases by half within 18 to 24 months. The board will also debate raising the overnight call rate target to 0.25% from 0-0.1%, potentially reaching levels not seen since 2008.
Reports from NHK and the Nikkei newspaper suggest the BOJ is considering a rate hike, pushing the yen to 152.65 against the dollar on Wednesday. Japan’s 2-year government bond yield surged in early Tokyo trading.
“A rate hike today would put an increase to 1% in sight by the end of fiscal 2025,” noted Naoya Hasegawa, chief bond strategist at Okasan Securities, highlighting the potential shift to a positive interest rate environment.
While more than three-quarters of economists in a Reuters poll expected the BOJ to maintain current rates, Japan’s economy faces rising inflation and significant base pay hikes. However, increased living costs have dampened consumption, leading to economic contraction in Q1.
Wednesday’s data showed a 3.6% drop in factory output for June, though future production is expected to rise. Retail sales grew by 3.7% year-over-year, exceeding forecasts.
Governor Kazuo Ueda indicated further rate hikes are possible if rising wages sustain 2% inflation. The BOJ aims to balance short-term rates between 0.5% and 1.5% without stifling growth. The BOJ’s decision will precede the Federal Reserve’s announcement, which is expected to maintain current rates but hint at future cuts. Concerns over a weak yen have prompted calls for a faster shift from near-zero rates.
