Bank of Japan: Gradual normalisation with higher JGB yields

Bank of Japan: Gradual normalisation with higher JGB yields – ING

Projected Policy Rate

1.50%

Expected policy rate of the Bank of Japan by mid-2027.

Projected JGB10Y Yields

3.0%

Expected yield on 10-year Japanese government bonds by 2027.

JGB Purchase Reduction

200 billion JPY

Current quarterly reduction in JGB purchases by the Bank of Japan.

§ 01 Executive Snapshot

What: The Bank of Japan (BoJ) is expected to implement a 25 basis point rate hike in June 2023.
Who: ING’s Min Joo Kang, Bank of Japan, Prime Minister Sanae Takaichi.
Why it matters: This move is a part of the BoJ's gradual normalization strategy amid inflationary pressures and resilient economic growth.

ING projects the BoJ's policy rate to rise to 1.50% by mid-2027, indicating a cautious approach to normalization.
JGB10Y yields are expected to reach 3.0% by 2027 as the BoJ continues its tapering of bond purchases.
The BoJ is currently reducing its JGB purchases by 200 billion JPY per quarter, with a potential pause in tapering due to improved market conditions.

The BoJ's decision for rate hikes comes in response to negative real interest rates and persistent inflation risks, despite soft inflation readings in May.
Historical dissent within the BoJ highlights the growing support for normalization, with three dissenting votes in favor of a rate hike noted in April.

Immediate market implications include potential volatility in JGB markets as rate hikes could influence foreign investment and currency valuation.
Long-term operational implications may include a shift in investor sentiment towards Japanese assets as yield returns become more competitive.

Regulatory risks may arise from political opposition to rate hikes, particularly from Prime Minister Sanae Takaichi, who has expressed concerns about the impacts of tightening.
Market volatility and geopolitical factors, particularly uncertainty in the Middle East, may complicate the BoJ's normalization strategy.

The BoJ's June meeting will be a critical milestone to watch for the announcement of the rate hike and JGB purchase plan.
Future developments in inflation data and wage growth will signal the success or failure of the BoJ's normalization efforts.

§ 07

What is the expected rate hike from the Bank of Japan?

The Bank of Japan is expected to implement a 25 basis point rate hike in June 2023.

Why is the Bank of Japan considering a rate hike?

The rate hike is part of the BoJ's gradual normalization strategy amid inflationary pressures and resilient economic growth.

How will the Bank of Japan's policy rate change by 2027?

ING projects the BoJ's policy rate to rise to 1.50% by mid-2027.

Who has expressed concerns about the impacts of tightening on rate hikes?

Prime Minister Sanae Takaichi has expressed concerns about the impacts of tightening.