By Groupama AM

Following its meeting on July 30-31, 2024, the Bank of Japan (BoJ) decided to raise interest rates by 15 basis points, from “0-0.1%” to “at least 0.25%”. This is the highest level since 2008. The BoJ also presented a detailed plan to gradually reduce monthly bond purchases in several stages, from the current 5.7 trillion yen to around 3 trillion yen from January-March 2026.

Beyond the announcements, there are two essential elements:

• The BoJ justified its decision by its growing confidence in the virtuous circle between wage increases, rising consumption and economic growth. Economic activity and price trends were “broadly in line” with the forecasts presented in April, while the pass-through of wage increases into selling prices strengthened. In particular, wage increases were widespread across all regions, sectors and company sizes. The average monthly wage rose by 2% year-on-year in May, the fastest pace since 1994.
• New forecasts suggest a further rise in rates by the end of the year. On the one hand, the slowdown in GDP growth projected for FY2024 (to 0.6% vs. 0.8% projected in April) would be temporary, and the recovery is confirmed for FY2025 and FY2026, with forecasts unchanged at 1%. On the other hand, the central bank is more optimistic: inflation will be able to wait for the 2% target on a sustainable basis, at 2.5% for FY2024 (vs. 2.8% projected in April) and 2.1% for FY2025 (vs. 1.9%). According to the BoJ, corporate and household inflation expectations have risen, and imported inflation linked to the weak yen represents a significant upside risk that requires particular attention.

Up to now, a monetary scenario anticipated a BoJ cautious in its monetary normalization, and therefore a hike envelope limited to 25bp in total over the second half of the year. This conviction remains intact, despite today’s announcement . En effet, la hausse nous parait décidée dans l’urgence alors que les fondamentaux ne sont pas encore suffisamment solides (faibles ventes au détail, croissance des salaires réels négatives, inflation des services en dessous de 2 %). Les élections à la présidence du Parti libéral-démocrate et donc au poste du Premier ministre, prévues le 20 septembre et pendant la réunion de la BoJ, ont probablement précipité la prise de décision.

Governor Ueda’s speech was relatively hawkish, leaving the door open to further rate hikes. However, these will only be possible “if growth and inflation evolve in line with the Bank’s forecasts”. We believe that a further cautious 10-15bp hike is possible in October: real wages could rise by then, as inflation moves back towards target and the spring wage agreement is fully reflected in wage statistics. At the same time, real interest rates remain negative, giving the authorities some room for manoeuvre. The only uncertainty concerns the evolution of the yen. The prospect of Fed rate cuts, if confirmed this autumn, will reduce the urgency of a Japanese rate hike.