Japan: BoJ to pause hike in June, continue QT - Standard Chartered

Bank of Japan (BoJ) will hike by 25bps in Q4 on concerns over growth momentum. USD/JPY's failure to break below 142 on multiple occasions since May raises the risk of a short squeeze. The BoJ to continue with QT at JPY 400bn per quarter from April 2026. Other permutations exist, such as staggering or slowing the pace of QT to between JPY 200-300bn, Standard Chartered's economists Chong Hoon Park and Nicholas Chia report.

Tightening in one form or another

"We now expect the BoJ to keep the policy rate at 0.50% on 17 June and hike by 25bps each in Q4-2025 (to 0.75%) and Q2-2026 (to 1.00%), versus our earlier call of 25bps rate hikes in June and Q4. Recent data underscores that the economy is not yet strong enough to absorb additional tightening. Household spending in April fell unexpectedly; real wages remain under pressure, and Q1 GDP contracted. These signs of softening domestic demand have been concurrent with inflation staying well above the central bank's 2% target, raising questions about the sustainability of the domestic consumption momentum."

"With consumption weakening and external headwinds intensifying, we now believe the BoJ will wait for clearer evidence that rising wages are translating into real spending. We expect the next rate hike in Q4, assuming improved visibility on domestic demand, wage pass-through, and the resolution of US trade policy uncertainty."

"The failure of USD/JPY to break below 142 on multiple occasions since May raises the risk of a short squeeze in the pair. On quantitative tightening (QT), our baseline is for the BoJ to maintain the bond taper at JPY 400bn per quarter from April 2026, although other permutations exist, such as halving the pace of the bond taper to JPY 200bn. The tail risk is if the BoJ accelerates the pace of the bond taper. Politics may exert less of a drag on JGBs once the current Diet session ends on 22 June, in our view."