ING Sees Bank of Japan Hiking to 1.25%, Guiding Rates Towards Neutral

ING analysts expect the Bank of Japan to raise its policy rate by 25 basis points (bps) to 1.25% and then move cautiously, according to a recent report from VT Markets.

The analysts anticipate that Japan's pro-growth policy stance will act as a constraint on rapid tightening, projecting two further 25bps increases in January and April, taking the policy rate to 1.75%, a level positioned near-neutral ahead of a temporary consumption tax cut on food and non-alcoholic beverages from 8% to 1% for two years.

The Bank of Japan's commentary has increasingly referenced the neutral rate, commonly framed at 1.1-2.5% in nominal terms, and the analysts flag a possible 50bps move, tying that risk to a wider policy understanding with Washington that could push USD/JPY lower, lessen the need for large-scale dollar-selling intervention, and support stability in JGBs.

With the Bank of Japan's September meeting just around the corner, traders should position for a stronger yen by buying short-dated USD/JPY put options or entering bear spreads, as spot prices hover near key support levels around 142.00.