ING analysts Chris Turner and Padhraic Garvey argue the Bank of Japan is likely to hike 25bp to 1.25% and then proceed cautiously. They see government resistance to aggressive tightening and project two additional 25bp hikes in January and April, taking the policy rate to 1.75%, which they view as near‑neutral ahead of a temporary consumption tax cut.

BoJ seen hiking but staying cautious

“Formal communication from the BoJ this year has acknowledged that the real policy rate is negative and needs to be raised. Various BoJ speeches have discussed the concept of a neutral rate, which most see in the 1.1-2.5% range in nominal terms.”

“We doubt the BoJ would want to shock investors and Scott Bessent by leaving the policy rate unchanged at 1.00%. A 25bp rate hike to 1.25% looks likely. The marginally bigger risk than unchanged rates is a 50bp rate hike, perhaps as part of a broader understanding with Washington designed to sustainably push USD/JPY lower, reduce the need for large-scale dollar selling intervention from the BoJ and help stabilise JGBs.”

“However, the Japanese government has an aggressive pro-growth strategy and will no doubt express its views against a more aggressive tightening cycle. Maybe we are underestimating a shift here, but it is hard to see government officials backing a much faster tightening cycle of either a 50bp hike in September or back-to-back hikes in September and October. Instead, our house view is for two further 25bp rate hikes next January and April, which would take the policy rate to 1.75%.”

“A near-neutral 1.75% policy rate next April seems an appropriate target before the consumption tax on food and non-alcoholic beverages is cut from 8% to 1% that month for two years. That will sharply depress headline inflation – perhaps for the next two years – and would create a difficult environment in which to deliver further tightening.”

“When it comes to prices, the BoJ narrative has firmly shifted towards inflation moving onto a sustainable path. One central theme now is that higher input/producer prices are more likely to feed through into broader CPI. The most recent Tankan business survey showed output price expectations rising sharply and the BoJ is focusing heavily on the 7% year-on-year growth in corporate goods prices.”