The Bank of Japan raised interest rates by 25 basis points as expected, bringing the policy rate to 1%. However, the truly hawkish signal came from its redefinition of the neutral rate. Deputy Governor Masazumi Uchida explicitly stated that the neutral rate is 'not usable for actual policy decisions,' implying that even if rates have reached the lower bound of the neutral range, the pace of rate hikes will not automatically slow down. JPMorgan expects the Bank of Japan could hike rates again in October as inflationary pressures intensify, with market focus shifting from the level of interest rates to the trajectory of inflation.
The Bank of Japan raised interest rates as expected, but uncertainty surrounding the terminal point of its policy stance is increasing. Deputy Governor Shinichi Uchida explicitly stated that the estimated range for the neutral rate is too wide to be used in actual policy decisions, implying that even if the policy rate has reached the lower bound of the Bank’s published neutral rate range, it would not be sufficient to slow the pace of rate hikes.
In a research report released on June 16, the Bank of Japan raised its policy rate by 25 basis points to 1% at this meeting, in line with broad market expectations. With Governor Kazuo Ueda absent from the meeting, the vote was conducted by eight members, among whom Asada—the first member appointed under Prime Minister Sanae Takaichi—cast the sole dissenting vote, citing downside risks to production and employment.
Regarding government bond purchases, the Bank decided to maintain its current tapering plan until March 2027, after which it will pause further reductions and keep monthly bond purchases at around JPY 2 trillion. According to the Zhui Feng trading desk, JPMorgan’s latest report argues that this rate hike will not impose significant downward pressure on the economy and forecasts another rate increase in October, when inflationary pressures are expected to become more pronounced.
The Neutral Rate: An Unanchored Policy Benchmark
The market’s primary focus from this meeting centered on Deputy Governor Shinichi Uchida’s characterization of the neutral rate.
He clearly stated, “The estimated range for the neutral rate is too wide to be used in actual policy decisions,” describing the current rate hike as “a policy calibration toward the neutral level,” and added, “We cannot determine in advance when we have reached a neutral stance; we will only know once we get there.”
This statement was more direct than previous remarks by Governor Kazuo Ueda. Although Ueda has long emphasized the uncertainty inherent in estimating the neutral rate, Uchida’s comments were notably clearer. The practical implication is that even though the policy rate has risen to the lower bound of the Bank’s published estimate for the neutral rate range, this fact alone does not mean the Bank will become more cautious about further rate hikes.
Committee Divergence: Disagreement on Inflation Assessment
The overall message conveyed in the policy statement and press conference was that core inflation is on a trajectory toward the 2% target. However, committee members were not unanimous in this assessment.
Members Takada and Tamura objected to this characterization, arguing that core inflation has already reached the 2% level. Uchida, during the press conference, noted that most other members expect the target to be achieved between the second half of fiscal year 2026 and the first half of fiscal year 2027.
Regarding the qualitative assessment of inflation risks, the policy statement noted that 'core CPI inflation faces upside risks relative to the 2% price stability target.' However, JPMorgan pointed out that this is not new information—the Bank of Japan’s April Outlook Report already embedded a forecast for core inflation (excluding fresh food and energy) persistently above 2% throughout the entire projection horizon (through fiscal year 2028). Uchida also stated that, compared with the April meeting, the diminished downside risks to the economy formed the primary backdrop for the decision to proceed with rate hikes.
Quantitative Tightening: Path Continues, Pace Slows
On government bond purchases, the central bank decided to maintain its current tapering plan until March 2027, after which monthly bond purchases will stabilize at approximately JPY 2 trillion, with no further reductions. The central bank also indicated that this arrangement remains subject to adjustment as circumstances warrant.
JPMorgan’s analysis suggests that if the aforementioned policy is maintained, the central bank’s balance sheet will continue to shrink, albeit at a slower pace starting in 2028.
Uchida’s explanation for the government bond purchase decision was relatively brief, stating only that 'market functioning continues to improve steadily, and thus we have decided to maintain the current stance for now.' JPMorgan noted that this explanation appeared somewhat less rigorous compared to his typically thorough reasoning on other issues.
Political Variables: Dissenting Vote and Governor Absence
Two notable political signals emerged from this meeting. First, Asada, the first BOJ board member appointed under Prime Minister Sanae Takaichi’s administration, cast a dissenting vote. JPMorgan noted that although the decision had been thoroughly pre-communicated and fully priced in by markets, this dissent may still signal persistent strong opposition within the government to the central bank’s policy normalization efforts.
Second, Governor Kazuo Ueda was absent from the meeting and did not cast a vote. Notably, during Uchida’s prior hospitalization, he participated remotely in the previous meeting and retained his voting rights, whereas Ueda was unable to vote this time. Uchida offered only that the reason was 'related to medical matters,' without further elaboration.
Additionally, Uchida avoided answering questions regarding the consistency between the central bank’s policy and the fiscal policy of the Takaichi administration.
JPMorgan: Another Rate Hike Likely in October
JPMorgan maintains its previous assessment and expects that this rate hike will not exert significant downward pressure on the economy.
The institution forecasts that, as inflationary pressures become more pronounced around the summer, the Bank of Japan will raise interest rates again in October.
Ueda reiterated at the press conference that the central bank will continue raising interest rates as core inflation moves closer to 2%, emphasizing that "it will be crucial to keep inflation stably around 2% going forward." Against the backdrop of an unanchored neutral rate, the trajectory of inflation data will serve as the key basis for the market’s assessment of the central bank’s policy path.
Editor/Deng