Introduction to the Bank of Japan’s Policy Meeting
The Bank of Japan (BOJ) is expected to keep its benchmark interest rate steady at 0.5% and boost its inflation outlook. This decision will be made at the end of a two-day policy meeting. All 56 economists forecast that the central bank’s interest rate will remain unchanged, according to a Bloomberg survey. The bank’s quarterly economic outlook report is also likely to be revised, with the inflation projection for this fiscal year expected to be higher.
Expected Outcomes of the Policy Meeting
A primary focus of this gathering will be the extent to which the BOJ signals another rate hike this year. With a US-Japan trade deal reducing some uncertainty, traders now see a roughly 75% chance of a move by year-end. BOJ officials believe that the possibility of another hike is likely after Japan’s trade deal with the US diminished a key source of uncertainty. The search for rate hike hints from the BOJ is gradually gaining momentum, with October becoming more popular as the potential timing for the next increase.
Impact of the US-Japan Trade Deal
The US and Japan unexpectedly struck a pact on July 22, setting most tariffs at 15%. This agreement is expected to provide relief for a core part of Japan’s economy. The lowering of auto levies from the 25% imposed in April is particularly significant, as it will help to boost the economy. The outcome of Japan’s negotiation was roughly within the range of the BOJ’s expectations, and it’s probably unnecessary to make a drastic change to the central bank’s overall economic outlook.
Inflation Projections
The BOJ expects economic growth to stall temporarily due to the tariffs, before picking up to bring underlying inflation to meet its goal sometime between October next year and March 2028. The pace of increases in the cost of living has stayed elevated, averaging 3.5% in the first three months of the fiscal year. Inflation has been driven by a surge in food prices, particularly rice, the nation’s staple food. BOJ watchers expect the bank to raise its median inflation forecast for this fiscal year to 2.5% from 2.2%.
Federal Reserve’s Policy Decision
The Federal Reserve is set to announce its policy decision hours before the BOJ, and its conclusion and signals could have major implications for the course of the yen. The Japanese currency has dropped the most against the US dollar in the past three months among major currencies, as the Fed and the BOJ have both remained in a wait-and-see mode.
Political Instability in Japan
This is the first BOJ gathering after Prime Minister Shigeru Ishiba’s ruling coalition sustained a historic defeat in an upper house election on July 20, reflecting high public discontent over inflation. With his government now lacking a majority in either house of parliament, the Japanese leader has been confronting resignation calls from both ruling and opposition party members. Political instability could make navigating policy more complicated, and the central bank will need to keep its eyes on the fiscal policy’s impact on inflation and bond yields.
Key Points to Watch For
Analysts will be watching the BOJ’s assessment of risk balance for inflation. The bank may replace and soften the term "extreme" in describing the level of uncertainty to reflect progress in trade talks around the globe. BOJ watchers will also be paying attention to any subtle shifts in Governor Kazuo Ueda’s tone during the post-meeting press briefing.
Conclusion
In conclusion, the Bank of Japan’s policy meeting is expected to be closely watched by investors and analysts. The bank’s decision to keep its benchmark interest rate steady and boost its inflation outlook will have significant implications for the economy. With the US-Japan trade deal reducing some uncertainty, the possibility of another rate hike this year is likely. The BOJ will need to strike a delicate balance to avoid sounding too cautious on raising borrowing costs, while also keeping an eye on the fiscal policy’s impact on inflation and bond yields.
