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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

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