BoJ Set for Rate Decision Amid Growing Hawkish Sentiment

The Bank of Japan (BoJ) is set to make a decision on interest rates at its meeting this week, and most economists agree that rates need to be higher. The BoJ retained its tightening bias when it raised the policy rate to 1.00% last month, stating that further removal of monetary accommodation would be required.

Since then, the BoJ has seen strong retail sales figures and a buoyant Tankan business survey for the second quarter, which likely provides comfort to the BoJ's view that a virtuous cycle between company profits, higher wages, consumption, and prices is ongoing. However, there are downside risks to growth from the Middle East conflict and higher energy prices.

The BoJ's forecast for modest GDP increases is expected to remain unchanged when it publishes its latest Outlook Report on Friday. Inflation expectations sourced through the Tankan survey indicate that All Enterprises see inflation at 2.6% YoY five years ahead, firmly above the BoJ's 2% target.

Some BoJ members may favour a faster hike as early as September or October, rather than the gradual six-monthly schedule of the next hike coming in December. The bond market is also showing signs of a steeper curve, with the two-to-10 year JGB curve steepening beyond highs seen in 2010.