As expectations for an additional BOJ rate hike strengthen, attention is focusing on the possibility of the policy rate being raised to 1.25% at the September meeting and on movements in the yen. Following the decision to hold rates in July, market pricing for the pace of rate hikes has advanced against a backdrop of inflation indicators and yen depreciation.
Expectations for an additional BOJ rate hike have strengthened further as of late August. In the Summary of Opinions released on 10 August, several members expressed the view that the pace of rate hikes should be accelerated. The market is focused on the possibility of a 0.25% hike at the Monetary Policy Meeting on 17–18 September, which would raise the policy rate to 1.25%.
One factor behind this is that July core CPI rose 1.8% year on year, while the underlying measure excluding fresh food and energy rose 1.9%. There are also concerns that persistently elevated corporate prices could affect consumption through further pass-through into consumer prices. Some also expect yen depreciation to push up import prices.
Market pricing has advanced rapidly, with the probability of a rate hike by September reported at approximately 82% as of 21 August. Depending on long-term interest rate movements and the progress of yen depreciation, the pace of further hikes after the increase is expected to become a key focus.
The yield on newly issued 10-year Japanese government bonds temporarily rose to 2.945% on 18 August, exceeding levels not seen in more than 30 years, but has traded around 2.879% since that day. In light of expectations for a BOJ rate hike and fiscal and price trends, market participants are considering the possibility that a break above 3% could affect Japanese equities and the mortgage market.
Even if the likelihood of a September rate hike is high, the yen could face a situation in which the anticipated news has already been fully priced in. Depending on the US-Japan interest rate differential and US policy developments, USD/JPY could continue to test the ¥158–160 range.
If the BOJ raises rates in September, improved bank net interest margins could be expected, while the move could be a negative factor for exporters and real estate stocks. Going forward, attention will need to focus not only on the outcome of the September meeting but also on the pace of subsequent rate hikes.