BOJ's Hawkish Signals and Inflationary Pressures Drive Bond Yields Higher
Mitsubishi UFJ Morgan Stanley Securities forecasts a July rate hike to 0.75% by the Bank of Japan (BOJ), citing persistent inflation and the bank's increasing hawkishness. It also projects a subsequent hike to 1.0% in January 2026.
Former BOJ official Nobuyasu Atago suggests a hike could occur as early as April due to the BOJ's focus on inflation overshoot risks. Japanese government bond yields have surged as markets anticipate the BOJ moving beyond its previously projected 1% rate ceiling.
Robust October-December GDP data and strong inflation have bolstered yen and bond yields, reinforcing expectations of a near-term rate hike. Hajime Takata, a BOJ board member, is expected to provide clues on the pace and timing of future increases in a speech and news conference on Wednesday.
The BOJ's hawkish stance has led markets to price in a high probability of a July rate hike to 0.75%. A private sector survey indicates most economists anticipate a further hike in the second half of 2023.
Former BOJ board member Makoto Sakurai predicts rates could reach 1.5% or higher within two years. The International Monetary Fund estimates Japan's neutral rate to be around 1.5% and expects the BOJ to raise rates close to that level by 2027.
US political pressure on currency manipulation may facilitate BOJ rate hikes by reducing government resistance to a stronger yen. The Japanese government is wary of Washington's potential actions if it fails to address the weak yen.