How to "see through" the actions of the Bank of Japan? Barclays: This "summary of opinions" next Monday is crucial

Last Friday, the Bank of Japan announced to keep the benchmark interest rate unchanged at 0-0.1%, with a unanimous 9-0 vote on the rate decision, in line with market expectations. However, BOJ Governor Kuroda Haruhiko also stated that the reduction of bond purchases will be announced at the July meeting, effectively delaying the normalization of monetary policy.

What will be the next move for the BOJ? Barclays Bank pointed out that the BOJ's language still maintains a slightly hawkish tone, acknowledging the recovery of the Japanese economy. The bank insists on the basic assumption that the BOJ will raise interest rates in July. The policy risk for the BOJ going forward lies in announcing a reduction in bond purchases while raising interest rates, with attention to be paid to the "Summary of Opinions" to be released on June 24.

Long-term JGB yields to rise

At the June meeting, as widely expected by the market, the Bank of Japan kept the benchmark interest rate unchanged. However, in the meeting statement, the BOJ indicated that the committee decided by a ratio of 8:1 to plan to reduce purchases of government bonds in the future.

Barclays Bank pointed out that BOJ Governor Kuroda Haruhiko has repeatedly stated that the BOJ is best to slow down the pace of buying Japanese government bonds during the normalization process. Although the BOJ has postponed the decision on this matter this time, it stated that it will "collect opinions from market participants and decide on detailed reduction plans for the next one to two years at the next monetary policy meeting on July 30-31."

Japanese government bond yields are influenced by various factors such as U.S. yields, redemption rates, expectations of further rate hikes by the BOJ, and trends in Japanese government bond purchases. Each factor has a different impact on yields.

Barclays Bank forecasts that by 2026:

The yield increase for 2-year and 5-year JGBs will be greater than that for 10-year and 30-year JGBs. The former is more affected by policy rate hikes, while the latter is more affected by the decline in the effect of Japanese government bond purchases, indicating that the yield curve will tend to flatten.

The bank's calculations show that based on different terminal rate and government bond purchase size assumptions, the 10-year JGB yield will be in the range of 1.09%-1.43% by the end of 2026.

BOJ believes the Japanese economy is moderately recovering

Furthermore, the BOJ also stated that the current Japanese economy is moderately recovering, although some regions are showing signs of weakness. The wording regarding specific content has remained largely unchanged.

Barclays emphasizes that since April, Japanese economic data has generally met expectations, and Kuroda Haruhiko hopes to confirm some information before the outlook report in July. If conditions are met, a rate hike in July is "naturally possible."

Regarding the issue of yen depreciation, at the press conference in April meeting, he stated that yen depreciation has little impact on underlying inflation, but there are signs of rising import prices. Kuroda Haruhiko hopes to see a more stable virtuous cycle between wages and inflation.

The bank also believes that the BOJ will not provide advance notice when raising interest rates. However, regarding the reduction of purchases of Japanese government bonds, the BOJ may communicate with the market in advance to digest the impact of the reduction in bond purchases, to avoid turmoil when raising rates in July.

On June 21, Japan will release the national CPI data for May, and on June 24, the BOJ will release the Summary of Opinions from the monetary policy meeting. The release of this information will allow the market to further assess the possibility of a rate hike in July