Synopsis:

ING expects the Bank of Japan to keep its policy rate unchanged at 0.5% at this week’s meeting, with focus shifting to its bond purchase operations. While no major changes are expected immediately, ING warns that the risk of a hike as early as July or September is significantly underpriced, and markets may need to reprice hawkish BoJ outcomes.

Key Points:

Policy Hold Expected:

• BoJ is widely expected to leave the overnight rate at 0.5%.

• Despite some speculation, ING expects no reduction in the BoJ’s quarterly JGB purchases (likely to remain at ¥400bn).

Hike Risk Underpriced:

• Market-implied probabilities:

  • ~10% for a July hike

  • ~25% for a September hike

• ING sees both as too low, citing rising domestic inflation pressure and the need for normalization.

Forward Guidance in Focus:

• The BoJ may not offer explicit guidance, but the tone of the interim bond operation review will be closely watched for policy normalization signals.

• A shift toward hawkish language—even without immediate action—could trigger FX market response.

JPY Implications:

• Yen remains an attractive hedge, particularly if US equities suffer from renewed geopolitical stress.

• Even if oil prices rise, a hawkish repricing of BoJ expectations could offset safe-haven drag on JPY.

Conclusion:

ING expects a steady policy hand from the BoJ this week, but warns that markets are underpricing the odds of a rate hike later this year. With rising domestic inflation and subtle signals of normalization, expectations could shift quickly—offering support to the yen regardless of broader risk sentiment