Bank of Japan: Outsized hike risks carry shock – DBS

DBS Group Research economist Ma Tieying expects the Bank of Japan (BoJ) to raise rates by 25bps at its September 17–18 meeting, describing a hike as almost certain given solid Gross Domestic Product (GDP), wage and inflation data. She argues a 50bps move or back‑to‑back hikes are unlikely, warning that outsized surprises could trigger renewed Japanese Yen (JPY) carry-trade unwinding and market volatility.

DBS sees cautious but hawkish BoJ path

"It is almost a done deal that the Bank of Japan will hike rates at the upcoming meeting on Sep 17-18."

“Recent data strongly support the case for a rate hike. Final 2Q GDP confirmed that the economy continued to grow at an on-trend pace of 1.4% QoQ saar, or 0.9% YoY, in 2Q. July wage data also surprised on the upside, with total wages and base wages rising 4.7% and 4.1% YoY, respectively. Meanwhile, underlying inflation measures [...] have converged with the 2% price target.”

"The most likely outcome is for the BoJ to deliver a hawkish 25bps hike while signalling a flexible pace of rate hikes at future meetings."

"An outsized 50bps hike at this meeting or back-to-back rate hikes at every meeting is not our base case."

"More importantly, the BoJ should remain mindful of the market impact of large policy surprises, given that the unexpected rate hike in July 2024 triggered a massive JPY carry-trade unwinding and jitters across global financial markets."

"The risk of carry-trade unwinding and excessive market volatility should not be underestimated if the BoJ were to surprise markets this time."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)