One in Three BOJ Watchers Expect July Hike Along With QT Plan

The Bank of Japan (BOJ) is anticipated to raise its interest rate in July and reveal a roadmap towards quantitative tightening (QT), according to one-third of economists surveyed by Bloomberg.

In a survey conducted by Bloomberg, 33% of 43 economists predicted that the BOJ will increase the upper bound of its policy rate from 0.1% at the board meeting concluding on July 31. This expectation aligns with previous forecasts made earlier this month.

Previously, the BOJ indicated that details about QT would not be available until July, leading some economists to believe a July rate hike was less likely. They argued that announcing QT details and a rate hike simultaneously would be too much. However, the likelihood of an October hike has increased to 42%, up from 33% previously.

“Nailing down the details of a cut in bond buying probably won’t be a constraint for a July hike," noted Ayako Fujita, Chief Japan Economist at JPMorgan Securities, in response to the survey. “The cost of postponing the adjustment of excessive monetary easing is rising with the emergence of upside inflation risks."

Implications of Quantitative Tightening

Regardless of the July outcome, the survey results indicate heightened interest and potential market volatility. BOJ Governor Kazuo Ueda has stated that a July hike is “of course" possible if supported by data. His remarks were consistent with the discussions at the June 13-14 meeting, where the nine-member board considered a rate move.

Earlier this month, the BOJ announced plans to reduce bond buying over two years, with Ueda mentioning that the scale of the cut would be “sizable." The BOJ will hold a meeting with market participants from July 9-10, providing bond traders an opportunity to glean final details of the plan.

“Chances are still fifty-fifty for a rate hike even after it dropped due to the push back of deciding the bond plan," commented Kentaro Koyama, Chief Japan Economist at Deutsche Securities. “The BOJ is retaining maximum optionality."

Market Reactions and Predictions

Survey results suggest a gradual reduction in bond purchases. BOJ watchers expect monthly bond buying to decrease to about ¥5 trillion ($31.4 billion) from the current ¥6 trillion starting in August, according to the median estimate of analysts. In two years, this figure is expected to scale down to ¥3 trillion.

One-third of the respondents anticipate the pace of bond buying to slow every quarter, while 36% believe it will be reduced every six months. About 17% think the change will occur annually.

Impact on BOJ Bond Holdings

The BOJ currently holds about half of Japan’s outstanding public debt, following more than a decade of extensive monetary easing that ended in March. As of last Thursday, the BOJ’s holdings stood at approximately ¥584 trillion. Every adjustment by the bank significantly impacts the market due to the sheer size of its holdings.

Economists estimate that the BOJ's outstanding holdings will decrease by about 11% to ¥520 trillion in two years, translating to an average monthly reduction of roughly ¥2.7 trillion. Despite this, the size of the holdings would remain just 7% below the scale of Japan’s economy.

“The BOJ’s bond holdings will drop, but its pace will be relatively slow and the bank will continue to hold a massive amount of bonds," said Mitsumaru Kumagai, Chief Economist at Daiwa Institute of Research. “The impact on bond yields will be limited from the reduction of the buying."