Bank of Japan: No one knows where the neutral interest rate lies

The Bank of Japan raised interest rates as expected, but uncertainty surrounding the policy endpoint is increasing. Vice Governor Shinichi Uchida explicitly stated that the estimated range of the neutral rate is too wide to be used for actual decision-making. This means that even if the policy rate has reached the lower bound of the neutral rate range announced by the central bank, it is not enough to slow down the pace of rate hikes.

According to the research report published on June 16, the Bank of Japan raised the policy rate by 25 basis points to 1% at this meeting, in line with market expectations. As Governor Kazuo Ueda was absent, the vote was taken by eight committee members. Asada, the first member appointed by the government of Sanae Takaichi, cast the sole dissenting vote, citing downward risks to production and employment.

On government bond purchases, the central bank decided to maintain the current reduction plan until March 2027, then suspend further reductions, keeping the monthly purchase scale at about 2 trillion yen. According to Chase Trading Desk, J.P. Morgan’s latest report believes this rate hike will not cause significant downward pressure on the economy and expects the central bank to raise rates again in October, when inflationary pressures will be more apparent.

Neutral Rate: An Unanchorable Policy Coordinate

The statement most watched by the market at this meeting came from Vice Governor Shinichi Uchida regarding the qualitative definition of the neutral rate.

He pointed out bluntly, "The estimated range of the neutral rate is too wide to be used for real policy decisions," and characterized the current rate hike as a "policy calibration toward the neutral level," further adding, "We cannot determine in advance when we will reach a neutral stance, only after we have reached it will we know."

This statement is more direct than Governor Kazuo Ueda's previous remarks. Although Ueda has long emphasized the uncertainty of neutral rate estimation, Uchida's language is more explicit. Its practical implication is: even though the policy rate has risen to the lower bound of the estimated neutral rate range announced by the central bank, this fact alone does not mean the central bank will become more cautious about further rate hikes.

Within the Committee: Diverging Inflation Assessments

The overall stance communicated in the policy statement and press conference is that core inflation is in the process of approaching 2%. However, there is disagreement within the committee over this assessment.

Members Takada and Tamura objected to the above, believing that core inflation has already reached 2%. Uchida stated at the press conference that most other members think the target will be reached between the second half of fiscal 2026 and the first half of fiscal 2027.

On the characterization of inflation risks, the policy statement noted "core CPI inflation has upside risks relative to the 2% price stability target," but J.P. Morgan pointed out this is not new information—the central bank’s April Outlook Report's core inflation forecast (excluding fresh foods and energy) already implied inflation would remain above 2% throughout the forecast period (to fiscal 2028). Uchida also stated that, compared to the April meeting, the fading downside risk to the economy was the main backdrop for this rate hike decision.

Quantitative Tightening: Path Continues, Pace Slows

On government bond purchase arrangements, the central bank decided to maintain the current reduction plan until March 2027, after which the monthly bond purchase scale will stabilize at about 2 trillion yen, with no further reductions. The central bank also stated this arrangement may be adjusted if necessary.

J.P. Morgan's analysis suggests that if this policy is maintained, the central bank's balance sheet will continue to contract, but the rate of shrinkage will slow from 2028 onward.

Uchida’s explanation regarding the decision on government bond purchases was relatively brief, only stating, "market function continues to improve steadily, so we decided to temporarily maintain the status quo." J.P. Morgan pointed out this explanation is somewhat less rigorous than his logic in other topics.

Political Variables: Dissent Vote and Governor’s Absence

Two notable political signals emerged from this meeting. First, Asada, the first central bank committee member appointed by the government of Sanae Takaichi, cast a dissenting vote. J.P. Morgan noted that although this decision was well-communicated in advance and fully priced in by the market, the dissenting vote may indicate that strong resistance to policy normalization still exists within the government.

Second, Governor Kazuo Ueda was absent and did not vote. Notably, Uchida, during his previous hospitalization, participated remotely in the last meeting and retained his voting rights, but Ueda was unable to vote this time. Uchida only commented that the reason was "medical-related" and offered no further explanation.

Furthermore, Uchida avoided questions about the alignment between central bank policy and the Takaichi government's fiscal policy.

J.P. Morgan: Possible Rate Hike Again in October

J.P. Morgan maintains its previous assessment, expecting this rate hike will not have a significant negative impact on the economy.

The institution expects with inflationary pressures becoming more obvious around the summer, the Bank of Japan will raise rates again in October.

At the press conference, Uchida reiterated that the central bank will continue raising rates as core inflation approaches 2%, emphasizing that "it will be crucial in the future to keep inflation stable near 2%." In the context of having no anchor for the neutral rate coordinate, the trend of inflation data will become the key basis for the market’s assessment of central bank policy trajectory.

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