On Tuesday, the Bank of Japan released its semi-annual monetary policy report.

In his speech, Bank of Japan Governor Haruhiko Kuroda stated that interest rates may be raised in July, depending on economic data. He also mentioned that no strong policy signals will be released by cutting bond purchase volumes.

After a fall, Japanese stocks rebounded and opened higher today. The Nikkei 225 index rose more than 1% at one point and is currently up 0.83% at 38,422 points.

The USD/JPY has slightly declined and is currently down 0.09% at 157.569.

The Japanese economy is recovering mildly.

Kuroda said that the Japanese economy is recovering mildly, and that fluctuations in foreign exchange will have an impact on the economy and inflation. He also mentioned that special attention should be given to these impacts.

From a specific perspective, exports were basically flat; corporate profits improved, and fixed corporate investment has shown a mild upward trend; employment and income have slightly improved.

Although private consumption is performing well, the impact of price increases still exists, and auto sales continue to decline due to some auto manufacturers temporarily stopping shipments.

Recently, the year-on-year increase in CPI, excluding fresh food, has been between 2.0% and 2.5%. Due to the continued moderate increase in service prices, factors such as wage increases are reflected.

Regarding future prospects, although the impact of cost increases caused by rising import prices on consumer prices is expected to decline, it is expected that by the fiscal year 2025, factors such as the weakening of the effect of government economic measures to suppress CPI inflation will further increase the increase.

At the same time, it is expected that the basic CPI inflation rate will gradually rise, and in the second half of the forecast period for the 'Outlook for Economic Activity and Prices' in April 2024, it may be at a level that is basically consistent with the 2% price stability target.

Kuroda pointed out that there is still a high degree of uncertainty in Japanese economic activity and prices, and there is a need to appropriately pay attention to the trend of financial and foreign exchange markets and their impact on Japanese economic activity and prices.

Interest rate hike may occur in July.

Regarding the Bank of Japan's monetary policy, Kuroda reiterated that interest rates may be used to adjust the degree of easing as needed, but interest rate hikes and bond purchases are two different things, and specific decisions on a possible rate hike will depend on data.

He also mentioned that no strong policy signals will be released by cutting bond purchase volumes, and it is difficult to say whether the size of bond purchases will be reduced at this time.

At the policy meeting last Friday, the Bank of Japan maintained its policy interest rate range at 0% to 0.1% for the second consecutive time.

Meanwhile, the Bank of Japan has decided to begin reducing its massive bond purchase volume and announced that it will announce a detailed plan to reduce bond purchases of nearly 5 trillion USD in July, taking another step towards exiting its large-scale monetary stimulus policy.

This decision has also increased uncertainty: whether the Bank of Japan may also raise interest rates at the July meeting or postpone it until later this year to avoid disrupting the market.

Kuroda said that the Bank of Japan has not completely believed that the target of a sustainable 2% inflation rate will be achieved, and it will need to spend 'more time' carefully reviewing various data before another rate hike.

With regard to interest rate hikes and bond purchases, analysts at UBS Group previously predicted that the Bank of Japan's quantitative easing policy would reduce its monthly bond purchases by about 2 trillion yen, which could cause the government bonds purchased by the Bank of Japan to decrease by 3-5% within a year.

However, the slow recovery in demand prompted UBS Group to lower the next interest rate hike time from July to October. Even after this adjustment, there is still a 30% chance that the market will predict an interest rate hike in July.

Analysts believe that the Bank of Japan's gradual quantitative easing is mainly to prevent sudden fluctuations in interest rates.

If the Bank of Japan takes more aggressive measures, such as halving its bond purchase scale or completing quantitative easing within two years, there may be a risk of significant market fluctuations, and the space for interest rate hikes may also expand.

Editor/new