BoJ rate cut has become more likely late this year.

Highlights:

• At its June 19-20 meeting, the Bank of Japan (BoJ) policy board left its monetary policy unchanged. It also gave no obvious hint that it would follow the much more dovish Fed or ECB soon.
• However, given that we now expect two key rate cuts by the Fed this year, the BoJ could also be forced into action. We now see it as slightly more likely than not that the BoJ cuts its short term policy rate by 20 bps.
• This expected rate cut depends very much on the Fed policy to maintain its dovish tilt, but also on a persistent strength of the yen, a continued cyclical slowing of growth in Japan’s dominant trading partners which backfires on domestic capex as well as Japan’s inflation rate to ease again.
• Given the BoJ’s already stretched policy tools, the BoJ action would be accompanied by further measures to mitigate its negative side effects. Currently, markets discuss a range of options, of which an extension of the loan program looks the most likely.
• Regarding the timing of the cut, market views still switch between October and December. Although we see a second Fed cut likely in September, we consider a rate cut in December the more likely date for the time being.

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