According to the IMF, the BOJ can “look through” much of the inflation shock related to the Iran war because of limited secondary-round effects. IMF anticipates that the BOJ will continue to raise interest rates incrementally up to 1.50% by the end of 2027. That would further support the argument for “patience”. However, when markets start interpreting delays as lack of resolve, there can be significant costs associated with patience.
Thus, the next decision in Japan may be influenced more by credibility than by a specific data point. As long as the inflation risk is contained and the yen is kept stable, then the BOJ can do things at their own steady pace. But when USD/JPY starts to gain upward momentum above 160, then the pressure will mount on the BOJ to act quickly. Under those circumstances, the market may force the BOJ into acting before it is ready.
The Bigger Picture
Interest rates still drive Japan’s market direction. The large spread between the U.S. and Japanese yields is still in favor of the dollar and it puts pressure on the yen. This is why the BOJ cannot risk appearing to be too slow, particularly if a weaker currency increases the cost of imports and maintains inflation risks alive. Meanwhile, it cannot tighten too quickly as this could harm growth. This puts the BOJ on a narrow path where credibility is more important than the data. Once markets begin to think that the BOJ is behind the curve, USD/JPY and bond yields might start to soar and force stronger policy response.
AloJapan.com