Bank of Japan: Gradual normalisation path outlined – Standard Chartered

Standard Chartered’s Chong Hoon Park and Nicholas Chia expect the Bank of Japan to hike its policy rate by 25bps to 1.25% at the 17-18 September meeting. They see the move as pre-emptive, with the economy able to absorb another modest hike, but anticipate a more patient phase of policy normalisation thereafter, given structurally slow growth and fiscal constraints.

Pre-emptive hike then slower pace

"We expect the BoJ to raise the policy rate by 25bps to 1.25% at its 17-18 September meeting, while avoiding an overly hawkish message."

"The economy appears able to absorb another modest hike: Q2 GDP growth was revised up, exports remain robust, investment indicators are resilient, and real wages are rising."

"Inflation risks are also increasing as higher energy prices and earlier JPY weakness pass through the supply chain."

"Meanwhile, consumption remains subdued; much of the recent inflation pressure is imported; JGB yields have risen sharply; and higher interest costs are beginning to constrain Japan’s fiscal position."

"We therefore view a September move as a pre-emptive hike, followed by a more patient phase of policy normalisation."