• Kept overnight call rate (OCR) unchanged and decided to delay bond tapering until end-July. TheBank of Japan (BoJ) maintained status quo and offeredfew details about its bond purchase reduction, partlydue to pockets of weakness in the economy and lack ofevidence for demand-driven inflation.

• Unanimous vote on the short-term interest rate: thebank maintained the OCR in a range of 0.0 – 0.1% byapplying an interest rate of 0.1% to deposits held byfinancial institutions at the Bank.

• The long-term interest rate (8-1 majority vote): BoJplans to reduce its purchase of Japanese governmentbonds (JGB) to allow long-term rates to be determinedmore freely by financial markets. The Bank will gatherviews from market participants and decide on a detailedreduction plan at the next monetary policy meeting.

• Guidelines for asset purchases (unanimous vote): To implement a gradual reduction in the purchase ofcommercial paper and corporate bonds, with theintention to halt purchases within one year.

• BoJ growth and inflation outlook: Japan's economy is poised to grow above its potential rate, fuelled by a virtuous cycle of income and spending alongside accommodative financial conditions. Inflation is expected to rise throughfiscal 2025, driven by narrowing output gaps and increasing medium- to long-term inflation expectations, aligningwith the bank's 2.0% price stability target. However, this optimistic outlook is tempered by significant risks, includinguncertainties in global economic activity, fluctuating commodity prices, and domestic wage and price-setting behaviour.

• The BoJ is on track towards normalising monetary policy and may hike again in September
  
  − BoJ Governor Kazuo Ueda stated that "it is conceivable to adjust rates earlier if the price outlook is revised upwardor if upside risks heighten." Consensus for Japan's May core inflation expects an acceleration to 2.6% from 2.2%in April as the country phases out utility subsidies. Although this does not signal demand-pull inflation, the impactof the largest wage hikes in three decades and rising service prices may soon push overall inflation higher,potentially compelling the BoJ to consider another rate hike in September. The BoJ may then continue to adopt adata-driven approach, possibly hiking again in December if necessary.
  
  − USDJPY year-end forecast (145.70; 2023: 141.04): Despite delaying the tapering of its bond purchases, Uedamentioned that the reduction of JGB purchases will be substantial and will commence immediately following thedecision at the next meeting. This, coupled with a potential rate hike in September and a possible rate cut by theFed in the same month, could help the yen trade closer to its fair value. However, the yen may not strengthen asmuch as previously expected due to Japan’s gloomy domestic economic outlook. Consequently, we have revisedour end-2024 USD/JPY forecast to 145.70 from an earlier projection of 132.00.

Source: Kenanga Research - 18 Jun 2024