The Bank of Japan is widely expected to leave its policy rate at 1.00% on 31 July, following June’s 25bp increase, while keeping a tightening bias that remains contingent on activity, prices and financial conditions. Since mid-June, retail sales have been firm and the second-quarter Tankan has lifted sentiment to levels last seen in 2018, supporting the case that profits, wages, consumption and prices are reinforcing each other. The bank still flags growth risks from the Middle East conflict and higher energy costs, yet the global AI capex cycle is seen underpinning demand, implying limited change to projections for modest GDP increases in the Outlook Report.
Inflation Dynamics And Market Expectations
On inflation, core CPI excluding fresh food, energy and institutional factors has eased from 3.6% YoY last summer to 2.1% in May, as earlier cost-of-living measures and July–September power and gas subsidies temper price pressures. Even so, Tankan-based expectations show All Enterprises at 2.6% YoY five years ahead, while import prices were running at 30% YoY in June and the yen remains at its weakest since the 1980s. Markets are debating whether the next move comes in September or October rather than December, with discussion of a neutral rate nearer 2.00%, and a 2–10 year JGB curve steeper than 2010 highs, although 10-year BEI has dipped back to 2.00%. Attention will also fall on a nine-member board and whether Kajime Nakata repeats a back-to-back hike vote, potentially joined by Junko Nakagawa and Naoki Tamura; elsewhere, USD/JPY is framed by the Fed and energy, with Brent at $70/bl cited as a key marker, spot seen near 163/164 and an outside risk of 165. Japan spent $70bn in late April/early May to support the currency and retains $1.09 trillion of FX reserves, while a year-end USD/JPY forecast of 158 assumes no further Fed hike; policy debate also includes tweaks to NISA after 2024 reforms and the constraints around GPIF allocation. In rates, the 5-year JGB yields about 2% and the 2-year about 1.5%, with forwards pricing a 2% policy rate in two years, while the 10-year is near 2.7%, the 5/10s spread around 70bp, and 30- and 40-year yields near 4%, a curve profile that risks keeping long-end yields elevated if the BoJ pauses; TONA-based modelling is described as still pointing to hike pressure.
