The Bank of Japan (BOJ) is widely expected to keep its benchmark interest rate unchanged at its July 2024 policy meeting, with market-implied probability of a hold at 98% and Polymarket odds at 99% as of Tuesday. However, attention is firmly on the central bank's updated forecasts and Governor Kazuo Ueda's statements for hints on the next rate hike.
The yen is at 40-year lows against the U.S. dollar, with USD/JPY reaching 163.98—a new 40-year high—increasing expectations of intervention by Japanese authorities.
The BOJ last raised rates in June 2024, bringing the benchmark rate to 1.0%, its highest since 1995. In its June meeting summary, the central bank stated that underlying CPI inflation has been approaching 2% and financial conditions are accommodative, justifying further rate hikes. The BOJ also noted that a weaker yen could weigh on CPI growth and constrict consumer spending power.
Analysts expect the BOJ to maintain a slightly hawkish tone at this meeting, supported by price pressures, strong wage growth, and the weak yen's continued impact on prices. The central bank may slightly revise its economic outlook upward and could raise its growth forecast from 0.5% to about 0.8%, according to some analysts.
The BOJ board is seen revising up its growth forecast for fiscal 2026 on receding fears of a severe hit from the Middle East conflict, according to sources. It is also likely to cut its inflation forecast due to subsidies and a drop in oil costs from April levels, though a weak yen may keep the downgrade small.
Most analysts polled by Reuters expect the BOJ to raise rates again to 1.25% by year-end. Capital Economics Asia-Pacific President Marcel Thieliant said the BOJ is preparing to raise rates again in October 2024, with the policy rate expected to reach 2% by end of 2027, above market expectations. Thieliant said rising crude oil prices mean the BOJ faces downside risks to economic activity, and yen depreciation further increases inflation risks from energy price rises.
The yen's status as a global funding currency means BOJ policy has an outsized influence on global markets. The yen carry trade can act as a liquidity source for crypto markets, and any unwinding could have wider consequences. Analyst Ricky Ho warned that carry-trade unwinds are 'rarely gradual' due to high leverage, and that changes in BOJ policy could have wider consequences.
The messages from the BOJ meeting will provide important clues not only for Japanese yen and bond markets but also for global risk appetite. Governor Ueda will face the challenge of talking down yen bears through hawkish communication, particularly with looming prospects of U.S. rate hikes weighing on the yen.
Japan's inflation data shows core consumer inflation at 1.6% in June, staying below the BOJ's 2% target for a fifth consecutive month, while reports suggest that core CPI excluding subsidies remains elevated.