The BoJ hiked a policy rate and will end the tapering of JGB purchases in FY2027

The Bank of Japan (BoJ) raised its policy rate from 0.75% to 1% on June 16 despite the uncertainty around the Middle East conflict. The BoJ kept its forward guidance that it will continue interest rate normalization. However, the persistent perception in FX markets that the BoJ is behind the curve will likely continue to put pressure on the central bank to hike the policy rate faster and higher in the coming quarters.

We continue to project that the pace of subsequent hikes will be gradual, occurring every six months or so, until the terminal rate of 1.5%, our estimate of the neutral rate, is reached. As the policy rate approaches the neutral rate, the BoJ will likely face a difficult dilemma regarding how much of a negative impact on domestic demand and the associated political pressures it can tolerate in order to curb yen depreciation.

The BoJ decided to end the tapering of its Japanese government bond purchases in fiscal year 2027, “with a view to improve the functioning and stability of the JGB markets” without referring to recent high volatility in global yields. The bank will amend the pace of JGB purchases only when deemed necessary.