BOJ Preview: Global Market Implications

Welcome to JP Morgan's at any rate podcast series. In this episode, we'll be conducting a preview on the Bank of Japan and what its current implications are for the global market at large. Now, for your host and head of content strategy here at JP Morgan, Samantha Zerello. Welcome, everyone, to our Bank of Japan preview call. My name is Sam Zerello and I lead content strategy for global research. And I'm thrilled to be joined by three experts on the Japanese markets. Joining us today we have Ayaku Fujita, who's our chief Japan economist. We also have Junya Tanasi, chief Japan FX strategist and Takafumi Yamawafki, head of Japan Fixed Income Research. They are bringing a lot of breadth and depth of expertise around this market. There's a lot going on. Global investors have been very focused on Japan, the Yen. So we have a lot to get into. So to start, we're going to kick it off with Ayaku and I want to ask what the expectations are for the September meeting and where you ultimately see policy rates in Japan peaking. Ayaku. Yeah, thank you, Sam Zerello. So beer day is highly likely delivering another 20 basis point late hike, taking the policy rate to 1.25%. So the key backdrop is that the B.O.G. has faced growing pressure to reduce its policy lag, particularly as a debate around the end week, this has become more serious since late July. At the same time, the critical backdrop looks at the less confrontational than in earlier episodes. There has been less over pressure from administration against highway, which no longer is a hurdle for the B.O.G. to move. So where the market focused will be is so it's not just the late hike itself, but the messaging around the pace. If B.O.G. follows June with another hike now, it leads to looking like a shift away from the previously emphasized cautious and gradual normalization approach. So the governor's press conference matter maybe investor will be listening whether the B.O.G. influenced the barricades of faster pace, something like quarterly hikes or whether it may assert a more step by step approach. So on the question of where for sealate ultimately peak, we do not expect the B.O.G. to offer a clear turn away signal. The B.O.G. has been on the concept of a neutral rate to anchor expectations, but it has also been emphasized and uncertainty along with the neutral actually is. And more recently, it has also highlighted the need to address upside inflation list, which naturally raises the question of whether it might go beyond neutral into destructive territory. So that said, our view is that it's still too early for the B.O.G. to credibility signal or move into destructive territory, given its long-standing question and the broader vertical sensitivity are on the higher boring cost. So in practice terms, we think the B.O.G. is likely to frame the destination as toward neutral while keeping as a terminal rate deliberately ambiguous and data dependent, rather than committing to a level. So we expect the B.O.G. as policy rate to 0.25%, not percent by the end of 2027, but we have argued that this level may not necessarily present the terminal rate with the possibility that latex could continue into 2028. Okay, excellent. I was really good level setting, Ayaka. Thank you. Let's now go deeper into some of the factors, because I don't think any central banker on the globe has it particularly easy in terms of how to make their policy decisions. But when I look at your research that you and the rest of the team have put out, there's a lot of different factors interacting with the rates outlook, which Ayaka, you already mentioned a few of them, but just to go over them, we've got inflation higher than expected, or perhaps finally, you know, really heating up. There's the level of the yen. We can bring in junior later about, you know, the Treasury Secretary kind of commenting on the level of the yen versus the dollar. There's fiscal concerns, and then there's obviously growth and keeping the economy humming and, you know, growing and expanding. Can you walk us through the high level trade-offs and interactions that the BOJ and by extension investors might be watching closely? Sure. At the high level investors are watching a set of trade-offs that all connect back to one central equation. How quickly can BOJ know Mars policy without creating unwanted volatility in the economy on the market? So let me break into four interacting channels. The first one is the inflation versus growth. The BOJ is increasingly highlighting upside inflation lists, which strengthen the case for continuing normalization. But Japan's growth sensitivity to financial condition is too unknown, even after decades long low interest rate environment. So the BOJ has to balance the risk of moving too slowly, allowing the inflation list to build against moving too quickly, untitling the industrial growth road and all creating financial market stress. So this is one reason the BOJ will likely to keep emphasizing data dependence, rather than a presented present hiking pass. And second trade-off is the yen and late differential. yen is not an expressive BOJ target, but it's an important transmission channel. So a large Japanese trade rate differential can keep depreciation pressure on the yen, which can feed into import cost and inflation dynamics. So when the yen weakness becomes politically and economy Koreans start yen, it increases the pressure on the BOJ to reduce policy divergence. So in spite of why recent moves toward collecting in weakness have martyrs for market expectation into this meeting. The third one is fiscal constraint and the cost of carry for the suffering. Even modest increase in rates can matter for the government funding cost over time, especially up as debt loss and car prices. That doesn't mean the BOJ cannot hike, but it does mean the BOJ has an incentive to avoid triggering a disorderly move in the GGB curve. So this is another reason communication is still critical. The BOJ may hike, but still try to prevent the market from extra providing aggressively to a high terminal rate. And fourth one is actually politics and governance signals. How comfortable the administration is with the hiking pace. Japan is unique in that investor pay cross-attention not only to the policy direct decision, but to singleness along the administration's posture. Two, you know, practical indicators are watched closely for the meeting this week. The number of dovish dissents and line up over to government representatives attending the meeting. So if both members seem as aligned with administration, here we have two of them, or both the hike, that can be lead as a preference to destroying the hiking pace from the government. And also if government participation remains prominent, and no particular, the government actually not attendance from the finance minister, it can reinforce the perception that political sensitivity around the ladies is too high. So putting it together, what we are really trying to infer this upcoming meeting is the is the BOJ hiking as one of adjustment or at the start of personalization pace. And that's the BOJ language about upside-the-inflation list transferred into the willingness to go beyond neutral, or is it primary or justification for moving toward neutral sooner. And finally, is there any sign that political constraints will reassert themselves on top of the pace? These are the key exchange transactions that will likely actually drive the market reaction as much as the late move itself. Excellent, thank you. Janie and Takofumi, I'd like to bring you now given your expertise in effects and rates. So Ayako mentioned something interesting that the YAN is not a BOJ target specifically, but it is an incredibly important transmission mechanism. Janie, is there anything you'd add in terms of the trade-offs that are being happening here with rate hikes versus moves in these different variables? Yeah, thanks for the question. And I'd like to add under some given color, under to the trade-off that I mentioned by Ayako, interest rate, and the effects. I can say that not only the TAKAITI administration, so all Japan's government has a face of trade-off and between the exchange rate and the interest rate. However, although there is no consensus on whether they are aimed at say, 160, is positive or negative as a BOJ economy. Shabrising short-term interest rate is clearly negative as a BOJ economy. As a result, the policy makers have the tendency to maintain the low interest rate while trading in some degree of YAN. As for the period after the launch of the TAKAITI administration, last October, market perceived the tendency had to be particularly strong and increasingly viewed as a demonstration that pressure in BOJ to keep rates at low as possible. And this has heightened concern that the BOJ's monetary policy would fall behind the curve, resulting in the acceleration in the end depreciation. At the point, the coordinated intervention is right, and at the BOJ rate, high expectation lies in quickly. Behind us, we have concern, has eased, and this has contributed to the recent end-appreciation. However, I think the fundamental trade-off between Vietnam and the Iraqs, Japan policy makers face at the tolerating the end-weekness in order to keep interest to low remains essentially unchanged. That's for me. The B.O.Js are ratepress from here, the middle-aged situation as the most important factor I think. The global inflation pressure would likely ease as well. In the case, the market would probably scale back the expectation for further rate hikes. It would also become harder for the yen to weaken significantly. Also, that would reduce the expectation for additional B.O.J hikes. At least, I don't think the market would continue to price rate hikes every three months as it does today. The problem is that the situation is now spreading into the red sea, which increases the risk that inflation remains elevated for longer. So, in my view, this kind of inflation can be solved easily. There will be just a few rate hikes with the central banks that actually deliver more hikes. They will need to keep the show in the hawkish stance to fighting inflation. That if the Fed continues to signal that rate may stay higher for longer, that could also create the further pressure on the yen depreciation. So, in that environment, one of the investors are likely to stay cautious about having long duration assets, and that could keep outward pressure on yields. So, for me, the middle-aged situation is the crucial one. Talk about me. One follow-up question for you, and then, junior, please feel free to add anything else. In terms of market pricing, you and the team put out a note on Friday. How do you see expectations versus market pricing? Are we over undershooting, and what do you maybe expect going forward? Yes, so last week, the GGB market was pressing out rate hikes. Roughly every streamer and a terminal rate priced by the market reached about 2.5%. Expectations have come down somewhat slightly recently, but the market is still pricing very, very aggressively targeting the price. Based on my conversation with the main investors, most people are the seem to view 1.75% or 2% as they're on the base case of terminal rate. At the same time, many are using something closer to 2.5% as a risk scenario. So, what I really hear is anyone talking about the terminal rate was 3% or higher. So, when I look at the current market pricing, the terminal rate of 2.5%, this still feels somewhat high relative to what most investors actually expect. So, if we think in terms of probability weighted outcome, the something closer to 2.1% or 2.2%, maybe more reasonable level, I think. This is one of the reasons why I recommend that the two stands are the steepener. The firm end is still a reference quite aggressively targeting the expectation. So, of course, a lot will depend on inflation, the yen, development and the Middle East. If market is set to scale by something or a reasonable rate, the high expectation, I would expect the firm end to benefit the most. Thank you. So, before we go into the yen in focus, I want to get to one client question we just received, which I think is very relevant given everything we just discussed. So, noting that the US administration does make a lot of comments and, you know, says a lot of different things. The questions around how the market should read US Secretary Bessence comments. In particular, he's talked about the yen a lot and the BOJ, for instance. So, Ayako, the question is in practice, how much influence does the US have on the BOJ decision-making? I think, you know, even with the secretary Bessence comment, the BOJ was about the hike. But, of course, actually, BOJ itself was not 100% sure whether actually they can get an understanding from the administration. So, I think, actually, you know, the Secretary Bessence comment indoors, actually, BOJ decision and actually, you know, holding back, actually, government interference to the BOJ decision. So, in the sense that, actually, of course, actually, you know, the BOJ is behind the car right now. And the poor way, actually, degree of behind the car, we get a little bit excessive. So, they need to catch up. So, I think, basically, I think, I think, you know, direction itself is there, even without actually, not the Secretary Bessence comment. But, actually, you know, he, you know, clearly, actually, by making such a statement, I think he removed the unnecessary, actually, government interference on the BOJ decision. Okay, fantastic. Junior, I wanted to ask about the yen and how perhaps the relationship between the yen has changed over time with the yen and the policy rate that the BOJ sets. You did a piece of research on this and referenced it. Do you want to just talk through how that relationship may or may not have changed over time for clients? Yeah, some of those questions. And I can say that regarding about the relationship between the BOJ rate high expectations and the yen exchange rate, major shift has occurred since the coordinated intervention at the end of the ride. The relationship between the BOJ rate high expectation and the yen exchange rate has normalized as a conclusion. As I said, after Takaichi administration's inauguration last October, a concern intensified that BOJ would fall behind the curve. Against this factor, the negative correlation strengthened between the BOJ rate high expectations and the yen exchange rate. But the market to price them at that time was in my understanding the scenario in which the BOJ stayed behind the curve, yen depreciation would accelerate and the BOJ would eventually be forced into aggressive rate highs. However, after a coordinated intervention at the end of the ride, I made a growing view that the U.S. not only cooperated with the intervention, but also adds the BOJ to accelerate rate highs. The market increasingly concluded that Japanese government would allow faster BOJ tightening. Behind the curve, concern receded. Rising rate high expectations have begun to translate into yen strength. In other words, U.S. pressure has reduced behind the curve concern and resulting in issuing in this premium has contributed to yen depreciation recently. In this environment, the rear tactically bullish on yen and have kept yen long position versus reddish growth since August 24th. However, the normalization in the relationship between BOJ rate high expectations and yen also means if BOJ fails to meet market expectations, behind the curve concern could rise again and the risk premium could widen again, resulting in yen depreciation, not depreciation. From the mid-term perspective, the recent sharp rise in rate high expectations and yen depreciation has heightened downside risks as for the yen when the later higher expectation, we need to see it again. Given that, we continue to expect the rent to revert to 155 to 165 lenses over the medium term. Junior, thank you. As a follow-up, I want to ask about the FEMA repo facility. If we think about Japan's FX tool kit, there's more traditional intervention, there's BOJ rate hikes. When you think about these tools that that's at the disposal of the BOJ or the Japanese administration, where does the FEMA repo facility rank? Yeah, actually, it has a FEMA repo facility. Attracted attention, not the way that you conduct the finance that are selling intervention without selling in U.S. thresholds. This is at the Watt U.S., that Registry Security, based on the one Japan's tool. However, under current framework, it is not necessarily designed for the large scale, sustained setting intervention. Given the factor, such as short tenure and high cost. So at the moment, female post-tenor had only two things overnight and one week. And the cost is over yes, plus at a 25 basis point. It is quite high. If Japan genuinely wanted to use it for intervention, I think it would require the longer tenors and the lower cost. Moreover, even if such reform were implemented in the future, these would still be a level of facility. Level of facility is a level of facility. And it would not resolve the fundamental issues that it is there are setting intervention with the leap purchase agreement. So although this is my assessment, I suppose, of female post-tenor at this time. - Junior, thank you. I have one other question for you, but we'll come back to it because I want to make sure we get to talk about the fiscal expansion because layered on top of all of this, markets are endlessly interesting. The Japanese government did announce a proposed fiscal expansion which didn't seem trivial. Ayako, can you walk us through maybe some of those numbers and the scale, if I characterize that correctly, and then perhaps how this may work against the BOJ's efforts for price stability? - Okay, on next fiscal year's budget, the drafting process hasn't only just begun. So the ministry have already started to submit the initial request. And those requests are running at roughly 17% above this fiscal year's level. So we actually, there are lots of still unknown factors, but yeah, that's the kind of only available information we have so far, which is actually, which creates a bit of concern that actually ultimately we may get a very relatively large budget. So I think the largest thing is, it appears to be those tied to so-called the strategic investment priorities, which suggests meaningful upward pressure on spending. And at the same time, the government has also approved the consumption of tax cut on food, which would reduce tax revenue in the next fiscal year, which is probably about actually 0.6% of GDP revenue for gone. So at this stage, the directional picture is very clear, actually spending pressures and rising while revenue are likely to soften. PM Takaichi has repeatedly emphasized that the government will address this combination of higher spending on lower revenue without increasing the GDP insurance. However, the government has yet to present with a specific and durable funding fund. So that gap between the stated objective and the funding details is likely to become a key focus as budget discussions in progress. And we will probably get the final result of the government proposal by end of this year. So this part is for the later outlook, of course, because there's no interaction between fiscal and monetary policy. So of course, continue to learn about potential. And this is the case now, underlying inflation remains above the budget target, which is our assessment right now. And then as you move toward more expansion with fiscal policy, it would tend to enforce demand and laser-discovery inflation becoming more persistent. So in that environment, of course, actually be objective likely to face a stronger case to engage for rate hike in order to safeguard press ability. In a textbook setting, the outcome is actually very straightforward. Please go expansion with demand on central bank titan into the district territory and the inflation is automatically brought back under control. But Japan is not the textbook case. After such a long period of a little late, the lobby and sizable tightening cycle could potentially pose a real lease on creating large shock to both the economy and the financial market. So this is also a fiscal constraint to keep in mind, which government made that already extremely high relatively to GDP, which is not around 200% of GDP, higher rate would translate into rising sales rising cost. That increased the sensitivity of fiscal outlook to the build this type of pass. So on the other hand, if late hike so required to address inflation risk, the budget cannot in deep need remain in an extraordinary large balance sheet, well above 100% of GDP, while holding almost half of the outstanding GDP stock. In other words, normalization is not only about the policy rate, it also raised the question about the budget's footprint in the GDP market. So if fiscal policy turns more explanatory, investors will increasingly frame the situation as a set of actually tough choice. This is a BIOJ continued hiking despite the list prioritizing inflation control. Or if BIOJ saw the passable high cost to avoid this list, the firm may have to generate the new end weakness using the implication for the late differential. - Hi, Akko, I really appreciate your training as an economist that you noted what is kind of textbook or maybe macro class versus what happens in reality or could happen in reality. I wanna just ask you one quick corollary question to underscore something you said. So it sounds like it's early, these are the initial, you know, putting in of estimates. In your sense, and we can also bring in Takafumi here, when would the market start to really think about this though and really start to consider it in the worldview? Is it happening now or is it something where we can just kind of push it down once we have more clarity on the exact, those exact numbers? Let's make this, sorry, okay, I think this is happening. And of course, the market is still waiting for more clarity on the fiscal action of the budget for next year. So I think actually, but you know, gradually actually messaging came out from the government is actually expansionary direction. So that is why actually market is increasingly worried about it. But this is not just for next fiscal year's budget, right? Because if that should be the need to proceed with late hike, you know, let's say a quarter late hike from here, then actually if we get actually 2% of policy rate by mid of next year, then actually, you know, ultimately I think market will start calculating how much funding cost actually government may face, not just for next year, but 2028 and 2029. Because actually, you know, Japan's debt average maturity of red debt is cross to 10 year. So that is why actually we didn't have meaningful increase of the financing cost. But all this bonus period has already here, you know, ending now. - Okay, very helpful. Taka Fumi, is there anything you would add? - Yes, so one, yes, so one of the fiscal deficit over the next fiscal year is your large, but not quite so large compared with last year. If there is no supplementary budget, going for it, as the guys you mentioned, then however, the bigger issue in my view is that the current sense about the fiscal sustainability likely to remain in the market for years to come. I'm not even sure whether temporary consumption tax could really be reversed after two years. As a result, investors are finding it difficult to become comfortable or taking a decent risk. At the same time, there are a few natural buyers in the long-wind and the super long-wind receptors while our issuance of long-wind and also the super long-wind remains heavy. That supply demand imbalance is also a product program. And also in addition, the VUJ is continuing the QT at the pace of roughly 45 trillion per year. The compared with other markets, that creates a stronger tendency for the curve to steepen. So I would not point to a single factor, but it's really a combination of several forces. The fiscal concerns, limited demand from long-wind investors, heavy issuance and ongoing VUJ QT, are all working in the same direction. So that's why the understeeping pressure that has been ourselves sticky in Japan. - Pakafumi, thank you. You're already speaking to it and alluding to it, but I'm gonna just ask explicitly then about the long-end part of the yield curve. So we've seen a global repricing of term premia globally, I would say, and I know our global fixed income strategies would say that. How much of the Japan story right now is Japan's specific factors versus something that's maybe a little bit more global and ubiquitous in nature across fixed income markets? - Yes, so it's very difficult to break down our exaggeration, how much our age factor is contributing. But as I mentioned, so there are so many factors that are incurring global October premium issue and also the QT, so many, many factors. So and the GDP curve. So the steepening our pressure will continue, I guess. - Okay, thank you. Junya and Pakafumi, let's talk about global macro investors, arguably clients that we would have on this call. What are some of the global implications you're seeing coming from B.O.J. actions, Japanese government actions, in the next few months? months that investors should be keeping top of mind or aware of. At the front wave side, I think the reason why the US is cooperating with the Japan Deport to Caribbean weakness is the concern that the productivity in the JGB market and the food spill over into the US Treasury market. Rather than the level of Drian, it sells and I believe is the reason why the US intervened the European market rather than the Drian market when they conducted coordinated intervention on at the end of its right, there was a setting intervention that could be interpreted as a tolerance for as weak as by the US government, which could lead to several other US treasuries. So based on this if the Drian market becomes unstable again due to the US monetary policy and or Japanese government fiscal policy, it could once again trigger policy reaction by the US authority in the effects market. It is, how can I say, typical spill over in that the US and the Japanese government economic policy are into the global, so main channel should be US Treasury and its impact on the data. Junior, thank you. Takafumi, anything you'd add in terms of global spill overs or implications for global markets given what's going on in Japan? Yes. So right now the global bond market is facing our shortage of investors willing to take on Drian's risk as a result. New bond supply is not being able to solve it smoothly through auctions and use have been drifting higher. If you talk to the Treasury investors, the many investors will tell you that rising the GGB yield are putting upward pressure on US yield. On the other hand, if you talk to our GGB investors, the summer investors will say that they kind of step in and buy GGB because our US yields keep moving higher. So in a way, the both arguments are true. The key point is that bond markets are on the world have become more fragile. When one market comes under pressure, the pressure that quickly spills over into other markets as a result, the weakness in one bond market can easily reinforce weakness everywhere. So I don't think that this is our Japan story or US story along. At this really a global hydration story, the investors are cautious about adding hydration risk. The supply remains heavy in many markets and those forces are feeding into each other. That is why the yields have contributed to higher across the market. The issue is not one specific factor, so the combination of fragile demand or refrigeration have a supply, a strong linkage between global bond markets. So these are all their reasons. Given how fragile the global bond market has become, I think the political makers face this delicate balance act on the fiscal side. The global government needs to demonstrate a clear commitment to fiscal displaying. And this is need confidence that the levels will remain manageable over time. On the market price side, the global central banks need to show that they remain committed to the control in the high inflation. At the same time, they need to be recovery, not to move too aggressively or too slowly. The challenging is finding the right base of Titanic. Takofumi, thank you. That was put very well. And I heard the word kind of balance and the theme of balance woven throughout that. Let's end with Ayako and talk about risks. So Ayako, there is perhaps a consensus Japan outlook. What do you see as risks to that view that you would flag for clients and investors? I think the biggest near-term risk to the consensus of an outlook is the policy mixed up rise. The market could be miscargurated on both fiscal and monetary policy. And by the way, it's hard to define a single consensus because the method on the global investors is still deeper. In general, speaking, a global investor tends to be more hawkish and monetary policy, while a domestic investor tends to be more dovish as Takahumi made that out earlier. But no, relatively to what looks price-day, I see actually too asymmetrically. The first one is fiscal policy. fiscal policy could turn more expansion rate than expected, because they have concrete numbers are still unlimited. Some investors may be underestimating the risk of becasue spending or a fee of revenue to the nation, which could lift inflation persistent on the next-term premium. That's actually, I don't see much difference between domestic and external on that earlier, but I see some investors still underestimating the risk of a fiscal expansion. The career, obvious one, is the second ratio J, and the ratio J could end up more dovish than the share market is pricing, because current market pricing is a lot, actually. A lot of late highs are already in the pricing, and if you look at the OIS, market is almost the pricing. You know, relatively, you know, there's a number of quarterly pace of rate high and get to terminate well above 2%, across to 2.5%. It's still uncertain how much tightening the government can tolerate, given the political and fiscal sensitivity. So once, actually, we get a relatively easing pressure, I'm not 100% sure whether the actual budget can continue with quarterly pace of rate high. So the key list is a more fiscal expansion, but less budget tightening than price, which could drive a meaning for the pricing across the A to B and B. Ayako, thank you. I want to thank everyone for tuning in. For your time, I want to thank Ayako, Jr., and Takafumi for their time and their expertise. Thanks again. This communication was provided for informational purposes only. Please read the JPMorgan Research Reports related to its contents for more information, including important disclosures. Copyright JPMorgan Chasing Co, 2026, all rights reserved. This episode was recorded on Monday, September 14, 2026.