While the decision to maintain key interest rates was expected, the dissenting votes were not. They suggest that a future rate hike is still on the cards, despite slowing inflation, political uncertainty following the resignation of Prime Minister Ishiba, and trade tensions relating to US tariffs.
This context complicates making economic forecasts and therefore projections on the Bank of Japan's interest rate policy. Strategists are divided on the subject.
However, for the markets, a rate hike by the end of the year is now the central scenario, with a 58% probability.
The Bank of Japan began normalizing its monetary policy in March 2024, after keeping interest rates in negative territory for a long time.
And for the time being, we are still in this tightening phase, as the BoJ has announced a new step in reducing its balance sheet: the gradual sale of its ETFs.
According to Bloomberg, the Bank of Japan holds the equivalent of €212bn in ETFs. The BoJ has announced its intention to sell ¥330bn per year, or €1.9bn. These amounts are not likely to destabilize the markets.
The Bank of Japan began reducing its balance sheet last August, but announced in June that it would slow the pace of quantitative tightening (QT) in order to avoid an excessive rise in long-term interest rates.
