Overview
HSBC has updated its projection for the Bank of Japan, saying it now expects two 25-basis-point hikes this year. The first rise is anticipated in June instead of July, with a second increase penciled in for December. Together, HSBC's scenario would lift the BoJ policy rate to 1.25% by the end of the year.
Factors behind HSBC's revised call
In a note to clients on Thursday, analyst Frederic Neumann identified three key drivers for the changed forecast.
1) Policy Board composition and voting dynamics
The near-term makeup of the BoJ Policy Board is central to HSBC's thesis. Board member Junko Nakagawa - one of three recent dissenters who voted for a rate increase at the last meeting - has a term that expires on June 29. Her final meeting will be on June 16. HSBC expects her likely successor to be Ayano Sato, whom the bank views as more dovish.
At the same time, several other board members have adopted a more hawkish tone. Kazuyuki Masu was quoted saying: "if data do not indicate clear signs of an economic downturn, I believe it is desirable to raise rates at the earliest stage possible." HSBC notes that if three members with a hawkish stance join the three recent dissenters, that alignment would produce a 6-3 majority in favour of a rate increase.
2) Inflation pressures
Inflation readings are another pillar of HSBC's view. Core CPI excluding institutional factors climbed to 2.8% year-on-year last month, above the BoJ's 2% target. HSBC highlights that growth continues to receive support from AI-related exports and fiscal cushioning for households, factors that underpin price pressures.
3) Currency considerations
The third factor is the risk of renewed yen weakness if policy rates are held low for an extended period. HSBC argues that narrowing the interest-rate differential with other G10 economies "should at least help stabilise the yen." The bank warned that keeping rates too low for too long could invite further depreciation of the currency.
Market signals
HSBC noted that OIS markets are currently pricing in close to two 25-basis-point hikes this year, which is consistent with the bank's revised projections.
Implications
HSBC's assessment ties monetary policy prospects to internal central bank dynamics, inflation data and foreign exchange considerations. The bank's view implies potential near-term shifts in Japan's interest-rate outlook that market participants are already beginning to price in.