Bank of Japan still on course for October hike, for now

Summary

• The Bank of Japan (BoJ) held its policy rate steady at 0.50% at today's monetary policy meeting, a widely expected outcome.

• Today's meeting was the first decision since the trade deal agreed between the U.S. and Japan in July, meaning there was also significant interest in the BoJ's guidance on future policy. The BoJ upgraded both its GDP growth and inflation forecasts, which we view as consistent as some further eventual monetary policy tightening. At the same time, Governor Ueda made a range of comments that were mixed, but careful and cautious overall—perhaps tempering expectations of how soon the BoJ might raise interest rates.

• We expect the BoJ to hold rates steady at its next meeting in September. So long as Japanese economic activity holds up reasonably well, and a moderation in U.S. and global activity remains gradual and orderly, BoJ policymakers may have enough comfort and clarity to raise interest rates later this year. Our base case remains for the BoJ to raise its policy rate by 25 bps to 0.75% at its October announcement. That said, if Japan's economy slows especially sharply, or wage growth and domestic inflation trends undershoot, the BoJ's next rate hike could be delayed further, until January next year.

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