Bank of Japan: Gradual normalisation with higher JGB yields – ING

ING’s Min Joo Kang expects the Bank of Japan to deliver a 25bp rate hike in June, supported by resilient growth, negative real rates and upside inflation risks. Despite soft May inflation, underlying pressures and firm wages justify further normalisation. ING projects the policy rate rising to 1.50% by mid‑2027 and JGB10Y yields reaching 3.0% as tapering proceeds cautiously.

BoJ hikes and JGB yields seen higher

"The Bank of Japan is expected to deliver a 25bp hike at its June meeting. Despite Middle East uncertainty, resilient growth, negative real interest rates, and persistent upside risks to inflation justify BoJ rate hikes. There were already three dissenting votes in favour of a rate hike in April, and two others have since signalled support for further normalisation."

"While May inflation was quite soft at 1.4% YoY, this largely reflected government interventions and a high food-price base last year. Pipeline prices have climbed since March while the weak yen is expected to add more inflationary pressures. The BoJ is therefore likely to look through the current softness and instead focus on underlying inflation pressures that could build later this year."

"Firm wage growth is another reason to support the BoJ’s rate hikes. With growth near potential and inflation expected to remain around 2% through 2027, we expect the BoJ to raise its policy rate to 1.50% by the first half of next year."

"Meanwhile, the BoJ will also announce its latest JGB purchase plan at its June meeting. Currently, it is reducing purchases by 200 billion JPY per quarter through next March, but on the back of improved market functioning, the BoJ may pause tapering."

"Even if the BoJ pauses tightening from next April, its JGB holdings should continue to decline as redemptions remain sizeable. We expect this to help calm concerns about a sharp JGB sell-off and ease Prime Minister Sanae Takaichi’s opposition to further rate hikes. With the policy rate rising, JGB10Y yields are expected to climb, albeit at a moderate pace, reaching 3.0% by 2027."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)