MNI BOJ WATCH: Board To Discuss JGB Taper, Hold Policy

The Bank of Japan is likely to keep its policy interest rate unchanged at 0.50% at its June 16-17 meeting, with focus shifting to whether it slows the pace of reducing JGB purchases.

The BOJ has held the rate steady since it last hiked it 25 basis points in January. (See MNI BOJ WATCH: Unchanged; Ueda Insists Rates To Rise Gradually) The market sees little risk of a move higher next week, pricing in only a 0.5% chance and a 0.62% policy rate by December. 

While rate hikes are less likely, the Bank is expected to outline its JGB buying schedule through Q1 2027 to increase transparency, while retaining flexibility to maintain market stability. (See MNI POLICY: BOJ Wants To Keep Reducing Bond Purchases) Some board members see no need to slow the current pace of tapering – currently set at JPY400 billion per quarter – arguing the recent rise in longer-dated yields reflects improved market functioning, not something that should delay normalisation.

However, views remain fluid. Members are closely watching financial-market developments and will weigh “pros and cons” outlined by monetary policy officials during the pre-meeting blackout period. While no consensus has formed, a slower pace – halving the quarterly taper to JPY200 billion – is being seriously considered. 

Officials are mindful of avoiding any decision that could trigger a disorderly rise in yields, even if government financing is not a factor in BOJ decisions.

STICKIER INFLATION 

BOJ officials see slightly stronger inflation than they projected in April, driven by cost-push factors including high labour and transport costs, along with elevated rice prices.

While CPI growth is still expected to moderate, the timing may be later than initially forecast as second-round effects could keep goods and service prices elevated even if rice prices decline. Persistently strong CPI will likely keep real wages negative until later this year, delaying a recovery in household purchasing power as wage gains lag inflation.

TANKAN AND TARIFFS

BOJ economists are focused on the upcoming June Tankan survey, due July 1, to gauge the impact of U.S. tariffs on corporate profit and capital investment plans. 

But interpreting the results will be challenging, as responses are often based on provisional forecasts, some of which include the effects of tariffs, while others do not. The uncertain and shifting nature of the tariffs makes it difficult for firms to forecast profits and investment plans with confidence. As a result, economists must assess not just the data, but also the probability and reliability of business plans behind them.

BOJ officials expect it will take months to gauge fully the impact of the tariffs on exports and production, which have been distorted by front-loaded demand and are likely to decline as the reaction sets in. Unlike the one-time hit from a consumption tax hike, tariffs are expected to have more sustained negative effects after the initial reaction, adding downward pressure on both exports and production.