Goldman Sachs: Japan - FJElite

We maintain our forecast that the next BOJ policy rate hike will be on September 18, by 25bp to 1.25%. The yen, which we consider as one factor influencing the timing of rate hikes, has recently been strengthening. However, given that this yen appreciation is likely at least in part the result of the market pricing in further rate hikes, holding off on a rate hike could lead to renewed yen depreciation. Therefore, we think this yen appreciation will not deter the Bank of Japan (BOJ) from hiking.

Financial markets are beginning to price in the possibility of an acceleration in hiking, such as consecutive rate hikes in September and October. However, we think this is unlikely unless inflation overshoots (i.e., the BOJ falls behind the curve) and it becomes necessary to quickly raise the policy rate to a level well above the neutral rate. Currently, various statistics do not show any signals indicating overshooting inflation. We therefore still expect a subsequent rate hike in January 2027, with another (to 1.75%) in July 2027.

In the statement to be released after the Monetary Policy Meeting (MPM) on September 17-18, we will be focusing on whether forward guidance on monetary policy is revised - particularly, the wording added at the July MPM, which was to the effect that the BOJ would strive to stabilize the underlying inflation rate so that the risk of it overshooting 2% does not materialize. We will also be focusing on whether there are changes to the wording regarding the three upside inflation risks (the Middle East situation, Al-related demand, and yen depreciation) highlighted in the July Outlook Report, and whether the expression “financial conditions have been accommodative” will be maintained even after the policy rate is hiked.

At the post-MPM press conference, questions are likely to focus on the timing of future rate hikes and the assessment of the current exchange rate. We particularly focus on the BOJ's current assessment of whether it has fallen behind the curve, a factor that could influence the pace of future rate hikes (we think Governor Kazuo Ueda is unlikely to admit that the BOJ has fallen behind the curve). His views regarding upside risks to the underlying inflation rate, the level of the neutral rate and the possibility of an economic slowdown caused by rate hikes will also be in focus.