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Tuesday, July 23, 2024

BOJ Delays Bond Tapering But Rate Hike Still Possible Says UBS

BOJ Decision

The Bank of Japan (BOJ) opted to continue its current bond purchase pace at its June policy meeting, delaying the start of its quantitative tightening program. However, analysts at UBS believe an interest rate hike remains on the table for October.

At the two-day meeting, the central bank announced it would maintain it’s bond buying at present levels. It decided to develop a tapering plan over the next 1-2 years to gradually reduce purchases, to be detailed at the July meeting.

Significantly, the BOJ said it will hold separate discussions with commercial banks, securities firms, and asset managers to gather feedback on unwinding its bond portfolio in advance of a formal decision.

UBS Analysts

UBS analysts see this as an effort to avoid bond market disruptions by taking a cautious approach and providing clarity. It also suggests the BOJ is not rushing to significantly shrink its large bond holdings, despite criticism around the size. Further, the central bank lacks certainty around how yields may react during tapering.

BOJ Governor Ueda emphasized any reduction would be “fairly large,” which UBS took to confirm substantive quantitative tightening remains imminent.

However, UBS maintains its call for a 0.25% rate hike in October. It cites recent data confirming stronger real consumption and services inflation. UBS expects three more 25 basis point increases in 2025, bringing the rate to 1% by year-end.

Contingent on continued economic growth and normalization of inflation, UBS predicts the BOJ’s terminal rate could reach 1.5% in 2026, supporting the view a rate rise is still possible this fall.

Lazarus Lucas is the Publisher, editor, and creator of LJLNews. Stock Market enthusiast, with an interest for politics. Independent trader, analyst, and asset manager. Lazarus publishes articles on LJLNews with technical analysis on various markets, such as currencies, stocks, and commodities. Contact: Lazaruslucas@ljlnews.com

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