Japan Rate Hike Now Expected in June Rather Than July

Despite the continued uncertainty around the Middle East conflict, we now expect the Bank of Japan (BoJ) to raise its policy rate from 0.75% to 1% on June 16. No action from the bank would invite further yen depreciation, exacerbating the terms-of-trade shock. In our view, BoJ Governor Kazuo Ueda’s hawkish speech on June 3 is a precommitment to a hike.

Prime Minister Sanae Takaichi remains worried about raising the policy rate too quickly, and this is a risk to our revised forecast. However, we believe she’s also concerned about the weakening yen, especially with the impact of recent FX intervention quickly diminishing amid rising market expectations of Fed rate hikes.

The BoJ will also announce its FY2027 exit plan from quantitative easing at its June meeting. It will be a close call, but we think the bank is likely to prioritise the stability of the Japanese government bond (JGB) market, either by keeping its monthly purchases of JGBs at JPY2.1tn (close to the level before quantitative and qualitative monetary easing started in 2013) or by only marginally reducing the amount.