Societe Generale Slams Bank of Japan's Monetary Policy Path as Weak Demand Persists

The Bank of Japan's (BoJ) monetary policy path is facing renewed scrutiny due to persistent weak domestic demand, according to an analysis by Societe Generale. The report highlights that Japan's economic recovery remains fragile, with consumer spending and business investment lagging behind.

The BoJ's earlier optimism about achieving a virtuous cycle of wage growth and inflation may be premature, as core inflation has hovered near the 2% target since early 2025, but much of this is driven by import costs rather than robust domestic demand. The report argues that without sustained domestic demand, the central bank's ability to normalize policy, moving away from negative interest rates and yield curve control, is constrained.

This contrasts with the BoJ's own communications, which have signaled a gradual tightening path. Societe Generale's view adds to a growing chorus of economists questioning the timing and pace of BoJ rate hikes. The uncertainty over BoJ policy has direct implications for the Japanese yen, which has remained under pressure against the US dollar.