BoJ Predicts Gradual Rate Hikes, Targets Near-Neutral Policy Rate by April

The Bank of Japan (BoJ) is likely to raise interest rates gradually, according to ING analysts Chris Turner and Padhraic Garvey. They predict a 25bp hike to 1.25% in September, followed by two more 25bp hikes in January and April, taking the policy rate to 1.75%. This target rate is seen as near-neutral ahead of a temporary consumption tax cut.

The BoJ has acknowledged that its real policy rate is negative and needs to be raised. The concept of a neutral rate has been discussed in various speeches, with most seeing it in the 1.1-2.5% range in nominal terms.

ING analysts doubt the BoJ would leave the policy rate unchanged at 1.00%, citing government resistance to aggressive tightening. They see a risk of a 50bp rate hike, possibly as part of a broader understanding with Washington designed to push USD/JPY lower and reduce the need for large-scale dollar selling intervention from the BoJ.

The Japanese government has an aggressive pro-growth strategy, which may limit the BoJ's ability to deliver a more rapid tightening cycle. ING analysts expect two further 25bp rate hikes next January and April, rather than a faster pace of tightening.