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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

USD Bears Broke The Bandwagon

• Investors ask whether threats to the USD’s reserve currency status are resting or dead, whereas we wonder if it was ever alive. Commentators routinely overextend narratives.
• The USD share of allocated FX reserves is already trending downward. A potential acceleration from smaller deficits and higher tariffs would partly offset the impact.
• Fuller hedging of USD asset holdings abroad may have already reached its limit. We still see more attractive mispricing elsewhere, such as excessively dovish rate curves.

By Philip Rush

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

• The BoJ held the policy rate steady at 0.5%, in line with expectations, while market sentiment shifted more dovishly, reducing the perceived likelihood of further rate hikes.
• Growth and inflation forecasts for 2025–26 have been revised down, with underlying inflation expected to remain weak and only gradually return to target levels as wage pressures intensify.
• Despite maintaining a tightening bias, the BoJ’s emphasis on downside risks and its data-dependent approach suggests a slow and cautious path toward further policy normalisation.