BlackRock: Bank of Japan is carefully normalizing monetary policy
Ben Powell, Chief APAC Investment Strategist at the BlackRock Investment Institute, responds to the Bank of Japan meeting.
The Bank of Japan (BoJ) is carefully and gradually normalizing monetary policy. It kept rates on hold today – in line with market expectations - following last month’s step of raising rates for the first time since 2007. It maintained its policy rate in the 0.0-0.1% range. Yet the central bank's modest upgrade to inflation projections - that now call for inflation staying close to its 2% target through to fiscal year 2026 - paves the way for incremental tightening in the quarters ahead. It will want to do so gradually to avoid choking off growth and derailing Japan’s return to inflation.
We see the BOJ persisting with this relatively dovish approach to support Japan’s domestic growth revival – a macro backdrop that is conducive for risk in our view. We stay overweight Japanese equities as corporate reform momentum picks up. We see the outlook for equities further buoyed by healthy earnings momentum and the valuation support from still-negative real interest rates. We are underweight Japanese government bonds given our expectation that yields will gradually drift higher from current levels.