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BOJ Policy Shift Despite Rate Hold

• The BOJ held rates at 0.5% with a 7-2 vote. Hawkish dissent from Takata and Tamura voting for 0.75% signals rising tightening pressure within the board.
• Surprise ETF/J-REIT disposal announcement (¥330bn/¥5bn annually) marks a significant normalisation step despite external trade headwinds.
• Core inflation at 2.7% remains above target. Overall, October rate hike expectations rise to 55% after the hawkish tone despite the hold decision.

Japan: Policy Rate Held At 0.5% (Consensus 0.5%) in Jul-25

• The BoJ held rates steady at 0.5% while dramatically raising its fiscal 2025 inflation forecast to 2.7% from 2.2%, exceeding market expectations and signalling potential policy acceleration.
• The risk assessment shifted from downside-skewed to balanced, the most hawkish change in recent quarters, though Governor Ueda's dovish press conference comments tempered near-term hike expectations.
• The Japan-U.S. trade deal reduces the increased tariff rate to 15%, materially improving the economic outlook. There is now an increased probability of rate hikes by year-end despite ongoing uncertainties.

Japan: Policy Rate Held At 0.5% (Consensus 0.5%) in Jun-25

• The Bank of Japan unanimously held its policy rate at 0.5%, in line with consensus forecasts, reflecting a cautious stance amid moderate economic recovery and subdued underlying inflation.
• The Board announced a gradual reduction in JGB purchases, with a detailed schedule through March 2027, while retaining flexibility to respond to market volatility and planning an interim review in June 2026.
• The outlook for future interest rate increases remains contingent on sustained improvements in underlying inflation and wage growth, with significant attention to global economic risks and domestic demand conditions.

Trump Doctrine: All Talk And No Trousers

• Despite the frenetic activity in the international arena that we have seen from the US in recent weeks, whether in trade or diplomacy, showmanship continues to trump substance, thereby posing real risks for policymakers and investors alike.

By Alastair Newton