Poland’s Strong Consumption and Investment Point to Robust Growth with Mild Inflation Outlook
Ukraine Peace Deal Hopes Weigh on EUR Inflation Swaps as Real Rates Hit New Highs
Germany’s Economy: Three Years of Stagnation With Only Limited Signs of Recovery
Commodities Move on Geopolitics and Weather as Oil Rises, Gas Falls, and Nickel Faces Supply Risks
USD Overvaluation Persists as Geopolitics Dominate and JPY Faces Intervention Risks
The Bank of Japan held rates steady, but hawkish sentiment grew with two dissenting votes. The market was surprised by the announcement to sell ETFs and J-REITs, which signalled the BoJ's firm commitment to policy normalisation. We continue to see October as the most likely time for a rate hike
As widely expected, the Bank of Japan maintained its policy rate at 0.5%. However, the surprise came from the fact that two board members dissented, favouring a 25bp hike, which indicates that more hawkish voices are growing within the board. The dissenting voters expressed the view that recent price trends indicated the BoJ’s price stability target had been largely met and noted an increase in potential upside risks to prices.
In its statement, the BoJ noted that inflation expectations have risen moderately, and underlying CPI inflation is generally consistent with the price stability target. We agree with the BoJ’s assessment. Recently, headline inflation eased – though mostly due to the energy subsidy program – while core inflation remained above 3%. Firm wage growth is expected to continue, and this is likely to keep inflation floating above 2%.
At the press conference, Governor Kazuo Ueda showed some confidence in the growth outlook. He continues to highlight high uncertainty, but sees little sign of tariffs having an impact on Japan's economy, and noted that the US-Japan trade deal reduced uncertainty quite meaningfully. Regarding inflation, the price trend is still below the goal, but is progressing towards 2%. Ueda also emphasised data-dependent decisions, and we believe he aims to maintain a balanced approach to future policy actions.
With reduced uncertainty and expected rate cuts from the Federal Reserve supporting US growth, the BoJ can proceed more confidently with policy normalisation. Core inflation has remained above 3% for an extended period. Even after a 25bp increase, the policy rate of 0.75% remains below the estimated neutral rate, which means that monetary conditions continue to be accommodative. We therefore expect the BoJ to deliver a 25bp hike in October.
Today, the BoJ announced its plan to reduce its holdings of ETFs and J-REITs. Although recent media reports had hinted at this development, the timing of the announcement was earlier than most market participants had anticipated. The unwinding process is expected to proceed at a measured and gradual pace. To reduce market impact, 0.05% of trading values will be sold in the markets. The annual sales amount, based on book value, will be 330bn yen for ETFs and 5bn yen for J-REITs. The BoJ also allowed sales amounts to be adjusted if key price indexes drop significantly.
While we continue to believe an October hike is possible, political factors may influence future policy decisions.
On 4 October, a Liberal Democratic Party (LDP) leadership election will take place; the outcome could affect the timing of monetary policy moves if a candidate with dovish views is selected.
Among the two leading candidates, Sanae Takaichi has publicly expressed her opposition to the BoJ rate hikes. Her policy stance closely aligns with that of former prime minister Shinzo Abe, indicating a preference for maintaining both monetary and fiscal policy easing measures. During her press conference held this afternoon, Takaichi pledged to raise the limit for untaxed income and eliminate gasoline taxes. She did not make any explicit comments regarding BoJ policy today. However, her fiscal spending plan suggests a preference for maintaining monetary policy in an easing position.
Another consideration for the BoJ is the Fed’s policy. If the Fed cuts rates again in October, the yen could appreciate rapidly, which may influence the BoJ's decision-making process. Japanese exports have suffered from US tariffs, but the impact has been partially offset by a weaker JPY. As a result, the central bank may exercise caution when it comes to rate hikes, as they could lead to a sharp rise in the currency.
CPI inflation eased to 2.7% year-on-year in August (compared to 3.1% in July and the market consensus of 2.8%), thanks to government subsidies. The energy subsidy programme reduced utility prices by 4%, while the free tuition programme lowered education prices by 5.6%. Meanwhile, food prices moderated, though they remained high at 7.2%.
Today's headline inflation growth was the slowest since November 2024, though it remains well above the Bank of Japan’s target range of 2%. Core inflation excluding fresh food and energy – a better gauge of underlying inflation – rose to 3.3%, down slightly from 3.4% the previous month. It increased by 0.1% month-on-month seasonally adjusted, with goods and services prices rising by 0.1% and 0.2%, respectively. Despite the slowdown in headline inflation, we believe that sticky core inflation represents a steady rise driven by demand-side pressure.
Going forward, we expect inflation to pick up in the coming months, with noise created by the government subsidy programme.
