One in Three BOJ Watchers Expects July Hike Along With QT Plan

The Bank of Japan will raise its interest rate in July in addition to unveiling a roadmap for its path toward quantitative tightening, according to one-third of economists surveyed by Bloomberg.

Bloomberg
Published26 Jun 2024, 03:29 AM IST
One in Three BOJ Watchers Expects July Hike Along With QT Plan
One in Three BOJ Watchers Expects July Hike Along With QT Plan

(Bloomberg) -- The Bank of Japan will raise its interest rate in July in addition to unveiling a roadmap for its path toward quantitative tightening, according to one-third of economists surveyed by Bloomberg.

Some 33% of 43 economists said the upper bound of the policy rate will be raised from 0.1% at the board meeting that concludes on July 31, the survey conducted on Tuesday showed. Prior to this month’s meeting, about the same percentage were penciling in July for a hike. 

When the BOJ said in June that QT details wouldn’t come until July, some economists said the likelihood of a July move had been diminished, as explaining QT details in addition to a hike seemed to be too much in one go. Meantime, those looking a hike in October now stand at 42%, up from 33% previously.

“Nailing down the details of a cut in bond buying probably won’t be a constraint for a July hike,” Ayako Fujita, chief Japan economist at JPMorgan Securities, wrote in response to the survey. “The cost of postponing the adjustment of excessive monetary easing is rising with the emergence of upside inflation risks.”

Whatever the outcome in July, the survey results show there will be intense interest with possible market volatility ahead of the event. Governor Kazuo Ueda has said a July hike is “of course” possible if data warrant it. His comments were consistent with the tone reflected in a record of the June 13-14 meeting, when the nine-member board held lively discussions over the case for a rate move. 

Earlier this month, the BOJ said it would specify its plan for the reduction of bond buying for up to 2 years, with Ueda saying the scale of the cut would be “sizable.” The BOJ will hold a meeting with market participants from July 9-10 as bond traders search for hints of the final details of its plan.

“Chances are still fifty-fifty for a rate hike even after it dropped due to the push back of deciding the bond plan,” said Kentaro Koyama, chief Japan economist at Deutsche Securities. “The BOJ is retaining maximum optionality.”

The survey results indicate only a gradual cut is expected in the amount of bond purchases.

BOJ watchers see monthly bond buying being reduced to about ¥5 trillion ($31.4 billion) from the current ¥6 trillion starting in August, according to the median estimate of the analysts. In two years time, they expect it to be scaled down to ¥3 trillion.

One-third expects the pace of bond buying to slow every quarter while 36% said it will be done every six months, according to the poll. Some 17% said the change will be every year. 

The BOJ owns about half of Japan’s outstanding public debt after more than a decade of the massive monetary easing program that finally came to an end in March. Its holdings stood at about ¥584 trillion as of Thursday last week. The size of the bank’s holdings magnifies the importance of every tiny step it takes. 

The median estimate from economists was for the amount of outstanding holdings to be reduced by about 11% to ¥520 trillion in two years, according to the survey. That would work out to roughly a ¥2.7 trillion reduction in bond holdings per month on average. The size of that holding would still be just 7% below the scale of Japan’s economy.  

“The BOJ’s bond holdings will drop, but its pace will be relatively slow and the bank will continue to hold a massive amount of bonds,” Mitsumaru Kumagai, chief economist at Daiwa Institute of Research, said. “The impact on bond yields will be limited from the reduction of the buying.”

More stories like this are available on bloomberg.com

©2024 Bloomberg L.P.

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First Published:26 Jun 2024, 03:29 AM IST
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