Hello, my name is Mary Park Durham, and I am a research associate at J.P. Morgan Asset Management here with a recap of the recent Bank of Japan meeting.

The Bank of Japan raised rates 15bps to 0.25% and announced it will begin cutting its Japanese Government Bond purchases by 400 billion yen per quarter starting this month to begin reducing its very large balance sheet.

Following the June meeting, hopes for a July hike were small. However, better economic data gave the BoJ enough confidence to normalize policy further. Although it lowered its core inflation forecast for 2024, it raised its 2025 forecast to 2.1% from 1.9%. This means the BoJ believes that inflation can stick around and that the recent wage hikes can positively impact real wages and consumers.

The BoJ owns over 50% of all JGBs and has been purchasing 5.7 trillion yen worth government bonds every month. This gradual balance sheet reduction should allow long-term rates to be determined by markets dynamics over time.  

Recently, there has been a lot of chatter about the yen’s trajectory and its impact on carry trades. Carry trades are borrowing a less expensive currency like the yen to invest elsewhere. The yen strengthened 3% following the meeting for a total of 7% in July. While the initial reaction was pronounced, the currency is likely to be guided by interest rate differentials with the U.S. in the near term, which should prevent more yen strength. Additionally, the BoJ’s hiking cycle is still expected to be gradual. Therefore, carry trades shouldn’t be impacted too much further, and for U.S.-based investors, Japanese equities may continue to experience a currency drag. Overall, Japanese equities should benefit from the improved earnings outlook and solid dividends over the long term.

Thank you for listening. For more insights on Japan’s economy and markets, please check out our website jpmam.com or our mobile app, “Insights” by J.P. Morgan Asset Management.