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What is the timing of the BOJ’s next rate hike? Credit Agricole weighs in

Published 2024/06/10, 08:00

Investing.com-- The Bank of Japan is only expected to begin raising interest rates by the second half of 2025, Credit Agricole (OTC:CRARY) analysts wrote in a note, stating that near-term weakness in the Japanese economy is likely to limit the central bank’s ability to act. 

The BOJ hiked interest rates for the first time in 17 years earlier in 2024, and signaled that it will begin tightening monetary policy on an outlook of higher wages and inflation.

This has put market focus squarely on the timing of the central bank’s next interest rate hike. 

But a swathe of weak inflation and economic growth readings from Japan somewhat muddled expectations of the next hike.

Credit Agricole analysts said that Japanese domestic demand was still below pre-COVID levels, and that the central bank was unlikely to have enough headroom to begin tightening policy.

They added that even if the BOJ raised interest rates further, it was only expected to raise the policy rate to 1%, keeping its real interest rate within negative territory. They said that the BOJ’s idea that the Japanese economy was experiencing inflation was a “flaw in its macro logic.” 

The BOJ had at its previous meeting raised its outlook for inflation this year, citing in part expectations of a bumper increase in wages, which is expected to boost spending. 

But inflation has so far remained languid, even as wage growth did increase in April as recent wage hikes took effect. 

The BOJ is set to meet on Friday, and is widely expected to tighten monetary policy further by scaling back its purchases of government bonds. 

But analysts were largely split over a rate hike by the central bank in June. Some analysts said that recent weakness in the yen could invite some action by the BOJ, especially if a weaker yen presented a higher inflation outlook.

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