BOJ to Hike Policy Rate to 1.0% by End-June, Sooner Than Forecast Before Election

• Markets are pricing in a further Bank of Japan (BOJ) rate hike to 1%, potentially as early as March or April, following the central bank’s exit from ultra-loose policy and cumulative tightening that lifted the policy rate to 0.75% in December, a 30-year high.
• A move to 1% could trigger significant household portfolio reallocation, as higher deposit rates incentivise Japanese savers to shift idle cash into interest-bearing bank accounts after decades of near-zero returns.
• Historical behaviour suggests the 0.5% threshold is a key trigger point, with past episodes showing that once policy rates exceed this level, household funds tend to flow rapidly into bank deposits, raising system liquidity held with the BOJ.
• Rising deposit inflows could complicate monetary-policy implementation, as increased reserves at the BOJ may exert downward pressure on money-market rates and hinder the central bank’s ability to guide short-term rates toward its policy target.
• The BOJ’s balance-sheet normalisation adds an additional layer of uncertainty, with the central bank shrinking a balance sheet that expanded roughly fivefold over two decades to about ¥756Tn (US$4.9Tn) following the large-scale stimulus launched in 2013.
• Reserve balances remain elevated at roughly ¥454Tn, though economists estimate the BOJ could reduce reserves to around ¥280Tn without triggering excessive volatility in short-term rates, contingent on future credit growth and bank lending dynamics.
• The transition away from prolonged monetary accommodation creates forecasting challenges, as the scale and speed of potential fund reallocation remain uncertain given Japan’s extended period of aggressive liquidity injections and entrenched low-rate behaviour among households and financial institutions.

(Source: Reuters)