Key Takeaways
- Bank of Japan (BOJ) members signaled a readiness for further interest rate hikes, contingent on the economic outlook and inflation trajectory, with some urging timely moves to prevent rapid adjustments later.
- Significant concerns persist within the BOJ regarding global trade policies and their potential impact on Japanese exports, particularly from US tariffs, with one member suggesting a 2-3 month assessment period for the US tariff policy impact.
- Japan's economic data for July and June presented a mixed picture: bank lending saw a robust increase, while household spending grew slower than anticipated, and the current account surplus narrowed.
- Divergent views emerged among BOJ members on inflation dynamics, with some noting accelerating underlying inflation due to second-round effects, while another maintained that inflation would stall before re-accelerating despite a Japan-US tariff deal.
The Bank of Japan's (BOJ) latest Summary of Opinions from its July meeting reveals a central bank navigating complex economic currents, with members expressing varied perspectives on the path forward for monetary policy. While a consensus appears to be building for future rate hikes, significant caution remains regarding external risks, particularly the impact of global trade policies.
Several BOJ members emphasized the need for further rate hikes when the opportunity arises, noting that the policy rate is still below neutral. One member specifically urged timely rate increases to avoid being forced into rapid moves that could potentially damage the economy. This sentiment was echoed by another who indicated that further hikes would be necessary if the economy and prices continue to track the BOJ's forecasts.
However, the outlook is not without its challenges. Uncertainty surrounding trade policy and its economic impact remains high. One member explicitly warned of a possible tariff hit to exports and suggested that it would take two to three months to fully assess the impact of US tariff policy. Another member highlighted that if the US economy manages to weather the tariff impact better than expected, the downside for Japan might be limited, potentially allowing the BOJ to exit its wait-and-see stance by year-end. Despite these concerns, some members believe the global economy could exceed expectations due to expansionary policies in the US, Europe, China, and emerging markets.
On the inflation front, opinions diverged. One member noted that underlying inflation is accelerating as price gains trigger second-round effects, suggesting a shift in focus from underlying to actual inflation, outlook, output gap, and expectations. Conversely, another member saw no change to the view that inflation would stall before re-accelerating, even with a Japan-US tariff deal. The importance of inflation expectations was also highlighted, with rising food and gas prices boosting price sensitivity and inflation expectations. Given this high uncertainty, one member urged judging the outlook without preconceptions.
Recent economic data for Japan presented a mixed picture. Bank lending, including trusts, increased by 3.2% year-on-year in July, up from 2.8% previously, with lending excluding trusts rising by 3.5% year-on-year. This robust lending growth suggests some underlying strength in the economy. However, household spending in June showed a less optimistic trend, decreasing by 5.2% month-on-month and growing by a modest 1.3% year-on-year, falling short of the 2.7% forecast. Furthermore, Japan's June Balance of Payments (BoP) current account surplus came in at ¥1,348.2 billion, significantly below the estimated ¥1,806.1 billion and the previous ¥3,436.4 billion. The trade balance on a BoP basis, however, was positive at ¥469.6 billion, exceeding the estimated ¥402.1 billion. The 10-year JGB Futures also saw a slight drop of 0.04 points in early trading.
Overall, the BOJ's July summary underscores a cautious approach to policy normalization, balancing the need for timely rate adjustments with significant external risks and mixed domestic economic indicators. One member still advocates for maintaining an accommodative policy to support the economy for now, while others watch US policy and FX movements closely for sharper shifts based on inflation and jobs data.
Ed Liston is a senior contributing editor at TheStockMarketWatch.com. An active market watcher and investor, Ed guides an independent team of experienced analysts and writes for multiple stock trader publications.