[b]Date: 31st July 2025.[/b]
[b]BOJ Hints at Rate Hike with Inflation Upgrade, But Trump Tariffs Delay Clear Signal.[/b]
BOJ Moves Closer to Tightening, But Timing Still Murky
The Bank of Japan (BOJ) kept interest rates steady at 0.5% during its July policy meeting but raised its inflation forecasts more than expected, signalling that the era of ultra-accommodative monetary policy may be drawing to a close.
However, Governor Kazuo Ueda and the policy board refrained from giving any guidance on the timing of the next hike, citing ‘high uncertainties’ stemming from new US trade tariffs and domestic political instability.
Inflation Forecast Raised to 2.7%: What It Means
In its quarterly economic outlook, the BOJ lifted its FY2025 inflation forecast to 2.7% from 2.2% and nudged up its projections for 2026 and 2027. The upgrades reflect ongoing price pressures, particularly from food and commodity imports. The BOJ’s upward revision of its price outlook does make it seem like a rate hike is coming closer. But Ueda reiterated that supply-side factors are driving inflation, suggesting policymakers are reluctant to respond with rate hikes unless wage growth and demand-driven inflation strengthen further.
Tariffs Keep Policy Outlook Cautious
A major source of uncertainty is President Trump’s new wave of tariffs, including on Japanese autos and industrial goods. While Japan reached a partial agreement with the US to reduce some levies, the BOJ is waiting to see how these measures affect exports, corporate profits, and investment.
This caution was reflected in a softened tone in the BOJ’s risk assessment, shifting from ‘extremely high’ to simply ‘high’ trade-related uncertainties.
‘There have been positive developments in trade and other policies,’ the BOJ noted, but added that more data is needed to support a rate hike.
Political Backdrop: Another Obstacle
Japan’s domestic political scene is adding further complexity. Prime Minister Shigeru Ishiba’s coalition suffered a significant setback in the recent upper house elections. Some members of the ruling Liberal Democratic Party are now pushing for leadership changes, which could impact fiscal policy and BOJ coordination.
Any rate move could become politically sensitive, especially if borrowing costs rise at a time when consumer inflation is already weighing on household budgets.
Market Reaction: Yen, Bonds, and Global Spillovers
The yen initially rallied following the announcement, but lost ground as Ueda failed to provide forward guidance on rates. USDJPY remains near the psychologically important 150 level.
Meanwhile, Japanese government bond yields have inched higher, with the 10-year yield approaching 1%, spilling over into global bond markets. US Treasuries also saw upward pressure after Powell’s hawkish tone, tightening financial conditions worldwide.
What’s Next? Eyes on December
While the BOJ appears to be preparing the ground for a year-end rate hike, the central bank is signalling that it will not move prematurely. The next few months will be critical as officials monitor wage growth, trade developments, and domestic demand. It is expected that the BOJ will act by December if growth holds up and the tariff impact is manageable.
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[b]Andria Pichidi
HFMarkets[/b]
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