BoJ Expected to Hike Policy Rate Amid Inflation Risks

Standard Chartered expects the Bank of Japan (BoJ) to raise its policy rate by 25bps to 1.25% at its upcoming meeting on September 17-18. This move is seen as pre-emptive, with the economy able to absorb another modest hike.

The BoJ's decision comes as inflation risks increase due to higher energy prices and earlier JPY weakness passing through the supply chain. Despite this, consumption remains subdued, much of the recent inflation pressure is imported, and higher interest costs are beginning to constrain Japan's fiscal position.

Chong Hoon Park and Nicholas Chia from Standard Chartered note that while a September move is pre-emptive, it will be followed by a more patient phase of policy normalisation. They anticipate this due to structurally slow growth and fiscal constraints in the Japanese economy.