BOJ REVVING UP

Global Watch - Quick Insights 31 Jul 2026

The BoJ delivered a hawkish hold today, raising market pricing of a September hike, our base case, by 19 ppt to 40%. A shift towards tightening was evident across three core metrics: 1) inflation and risk projections; 2) rhetoric on the speed of policy normalization; and 3) commentary on FX.

The Bank tweaked its GDP and CPI forecasts, emphasizing that financial conditions were accommodative and that the economy was resilient to higher rates. Inflation is projected to be at or above target for the entirety of the forecast period. More importantly, the BoJ stressed that "risks are skewed to the upside", adding that rising inflation expectations posed a danger to its price stability goal. In the press conference, Governor Ueda stated, "[we] need to be more aware than ever of the risk that inflation will rise faster than expected." A clear hawkish shift.

September is live. Ueda is typically clear when signalling that nothing will happen at the next meeting, talking about reviewing data or monitoring various macroeconomic factors. There was none of that today. Instead, he emphasised that "discussions on rate hikes will be held from the next meeting onwards." To add further to the sense of urgency, Ueda said the BoJ could make a move before it had made sure prices had stabilised around 2%.

Phrasing on the yen changed as well. The BoJ judged that the impact on prices from currency moves is greater than in the past and warrants closer monitoring. FX is typically not considered a driver of BoJ moves, as it is the Ministry of Finance's remit. However, the new wording indicates a greater chance of MoF-BoJ coordination going forward.

Taken together, this was a fairly hawkish meeting and goes some way towards setting up a September hike and a faster pace of tightening thereafter. We have conviction, but the market will continue to pressure the Yen until the prospect of further hikes is made more explicit. Inflation and expectations data, together with the next MPC member speech, currently scheduled to be delivered by Deputy Governor Himino on August 27, are critical signposts to watch.

The political backdrop is an important wild card. Takaichi's popularity is plummeting. No one likes rising prices and a weaker currency. A 10-point fall in approval ratings locks in the unnecessary consumption tax cut. However, fading support also gives more power to the BoJ and MoF in their inflation and FX-fighting roles. A cabinet reshuffle is in the works and will help indicate the future direction of Takaichi's fiscal policy.