Carlos Casanova says inflation and the domestic political uncertainty in Japan may affect the timing of Bank of Japan's decision to hike rates, but still expects a 25 basis point hike by the end of 2025. He also says the pace of yen appreciation is going to likely be more gradual than expected.

Tokyo

An economist has indicated that the Bank of Japan (BOJ) may consider moving up the timing of its next interest rate hike, as inflation in Japan continues to exceed the central bank's target. The BOJ is expected to revise its inflation forecast upwards, which could prompt earlier policy tightening, despite real interest rates remaining negative.

However, ongoing political uncertainty, including low approval ratings for the Prime Minister and potential elections, may delay the rate hike. The economist anticipates a 25 basis point increase before the end of the year, either in October or December, depending on inflation trends and political developments. The Japanese Yen is expected to appreciate gradually, influenced by both BOJ policy and broader US dollar movements.

Japan may bring forward timing of next rate hike: Economist

Well I think the focus this week is on inflation both in Japan and in the US if I'm totally frank with you. The market is expecting BOJ to remain on hold but keep in mind that July is when they do their quarterly revisions so we are expecting them to do something on the CPI front. GDP was lower to 0.5 percent in April so they don't have a lot of pressure to change their GDP growth forecast but they should admit that inflation is remaining above target. We are still seeing inflation above 3 percent. It is the bad type of inflation that the Bank of Japan doesn't want to see but it is high nonetheless. So we do think that they're going to move up from 2.2 to 2.5 percent and that is very important for investors because it brings forward the timing for the next BOJ rate hike. Remember real rates when you account for inflation are still hugely negative in Japan and so there is a need to tighten policy further. This could bring forward that deadline. Is there any possibility though that mitigating that timeline that the hike could be pushed down due to political uncertainty given that there's quite the situation going right now in Japan with the Prime Minister refusing to quit even amidst intense pressure for him to go? There's an intense pressure and also his approval on ratings has dropped to 20 percent so it remains to be seen how long he can stay but absolutely it is a possibility. We could have the conditions for a rate hike in October but if that coincides with an election then it is possible that the Bank of Japan will have to push this out to December but we are expecting 125 basis point rate hike before the end of the year either in October or in December depending on what happens with inflation and of course all of the election uncertainty. What about the Yen then? How does the Yen behave in this environment given that we have seen some increased volatility of late? Well the backdrop is broader US dollar weakening and so you are going to see strengthening across the board in Asia and including for the JPY. Investors have to reprice BOJ action a little bit and given that they've been so slow so incremental and there is this political uncertainty to factor in we think that the pace of Yen appreciation is going to likely be more gradual than expected. So we've recently revised down a forecast from 135 to 140 if you look at the consensus and it you know market is still expecting Yen to appreciate more than that so I think we are going to see some repricing and we are going to see more gradual pace of Yen appreciation following from that BOJ intervention that may take place in October or in December.

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Jerusalem

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Washington

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Hawaii

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Zaporizhzhia

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