BoJ Expected to Hold Rates as Japan's Macro Backdrop Favors JPY

Brown Brothers Harriman's (BBH) Elias Haddad expects the Bank of Japan (BoJ) to hold its policy rate at 1.00% after June's hike, with inflation still below target and markets pricing only gradual tightening.

The BoJ is widely expected to keep the policy rate at 1.00% due to the well-telegraphed 25bps hike in June. Inflation is running below the bank's 2% target.

According to swaps curve, the market price in a 25bps rate hike by year-end and a total of 60bps of tightening to between 1.50% and 1.75% over the next twelve months. This would still leave the policy rate near the middle of the BoJ's estimated neutral range (1.10%-2.50%) while the economy operates above potential.

However, the recent surge in USD/JPY to a near 40-year high last week was underpinned by firmer crude oil prices. Absent the renewed oil shock, Japan's macro backdrop would favor a firmer JPY.