Bank of Japan to keep the hiking cycle in place this year

Market & Trading Calls

• Growth Rebound: The Japanese economy flatlined in 2024 finishing up just 0.1% y/y. We currently assume an improvement in fortunes with growth expected to finish at 1.3% this year, albeit this will need to be revised lower if mixed signals around household expenditure translate to weaker than expected household demand growth.
• BoJ Policy: Core inflation, currently holding at 3.2% when measured over a six month period, remains well above the BoJ target. It is for this reason that we expect Ueda and the rest of the BoJ policy committee to raise rates by another 50bp this year, bringing the policy rate to 1%. This expectation currently outpaces the bond market, which sees rates higher just 12bp by this time next year.
• Mixed Consumption Signals: While consumer spending flatlined in Q4, a tight labor market, and positive real retail trade in January, point to improvements to start 2025. However, a contractionary preliminary services PMI read for March, and a sizeable decline in real wages through January are concerning developments that will need to be monitored.
• Weak Investment Outlook: Rising long-duration rates and uncertainties around US tariff policy are poised to keep investment on the sidelines through much of this year. Manufacturing PMIs continue to look excessively weak, and industrial production levels declined 12.3% m/m annualized in January.