Japan Monetary Policy Watch Ueda's Speech Policy Framework

Following Governor Ueda's June 3rd speech, Deutsche Bank has raised its probability of a June rate hike to be higher than a July hike. The bank expects the policy rate to reach 1.75% by April 2027.

Key Takeaways

• 1.Deutsche Bank has revised its expectation for the next Bank of Japan rate hike, now viewing June as slightly more likely than July.
• 2.Japan has entered a new economic regime where 'secondary spillover effects' of inflation are more likely due to active corporate wage-price setting behavior.
• 3.The Bank of Japan is highly vigilant about being 'behind the curve' and is prepared to hike rates if upside risks to prices outweigh downside risks to economic activity.

Table of Contents

• An analytical framework for decoding the speech
• Question 1: "Initial conditions" - A new economic structure after exiting deflation
• Question 2: "Inflation regime" - An environment prone to "secondary spillover effects"
• Question 3: "Desirable policy response" - A data-dependent stance and preparedness for risks
• Scenario 1: The likelihood of the baseline scenario increases
• Scenario 2: Upside risks to prices are judged to be dominant
• Conclusion: The probability of a June rate hike has risen slightly
• Appendix 1