Japanese Yen: Are inflation risks underpinning steady BoJ rate hikes? – TD Securities

Further interest rate increases remain likely for the Bank of Japan (BoJ), according to TD Securities’ Prashant Newnaha, who expects the target rate to rise roughly every quarter, with the next move in December. With inflation now judged to be at its 2% target, the BoJ’s priority is turning to preventing an overshoot. Even so, it continues to describe financial conditions as accommodative and flags upside risks from wages, FX and AI-related demand.

Has the BoJ Reached Its Inflation Target but Not Its Terminal Rate?

"Today's Statement reaffirms our view the BoJ is likely to continue raising the target rate roughly every quarter with the next hike to land in December. The Bank's focus has shifted from achieving the inflation target to preventing an overshoot and the forecasts reinforce this stance. The labour market, FX developments, and AI will be key factors shaping views on the terminal rate."

"So even with underlying inflation already at target, the Bank repeats what it said in July and September: “the Bank will continue to raise the policy interest rate and adjust the degree of monetary accommodation”."

"Very simply the BoJ is saying that labour market conditions have tightened by more than can be explained by the output gap. This will have implications for discussions about the neutral/ terminal rate. It's part of the reason why we are more hawkish than the street's forecast for the BoJ."

"However, with the tech sector coming under pressure in recent weeks, the clear risk to our 2.25% terminal rate forecast is a slowdown in AI spend. Such a slowdown would shave growth expectations and price pressures, lowering expectations for the terminal rate."

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