Japan Weekahead: Bank of Japan Set to Keep 0.5% Policy Rate, Focus on Possible Moderation in FY26 Balance Sheet Trim; Exports Hit by Trump Tariffs

(MaceNews) – Here are the key Japanese economic and political events for the coming week.

- Monday, June 16

1400 JST (0500 GMT/0100 EDT) - The Bank of Japan's nine-member board begins its two-day policy meeting. On day one, board members compare notes on the economic and financial conditions in Japan and overseas for about two hours. They discuss the conduct of monetary policy on day two from 0900 JST (0000 GMT June 17/2000 EDT June 16) for more than two hours.

- Tuesday, June 17

c.1130 JST (c.2130 EDT/1930 PDT Monday, June 16) The BOJ releases the outcome of its two-day policy board meeting in a monetary policy statement.

The board is widely expected to vote unanimously to maintain the target for the overnight interest rate at 0.5% for the third straight meeting amid uncertainty over the trade war and heightened geopolitical risk. BOJ policymakers agree that the overnight interest rate target remains the key policy tool, not changes to the bank’s asset holdings as it has embarked on quantitative tightening (unwinding of massive asset purchases conducted under the previous governor, Haruhiko Kuroda, who tried in vain to turn around the deflationary mindset by flooding the financial system with cash).

The board is likely to maintain the slowing pace of asset purchases by ¥400 billion a quarter for the current fiscal year ending in March 2026. In July last year, the board decided in a unanimous vote to start reducing the pace of its purchases of JGBs gradually to around ¥3 trillion in the January-March quarter of 2026 from about ¥6 trillion then. In principle, it will reduce the pace by roughly ¥400 billion every quarter.

MODERATING PACE OF FY26 BALANCE SHEET TRIM

The focus is on how fast the bank should reduce the scale of its purchases of Japanese government bonds in fiscal 2026 starting in April 2026; the bank is expected to moderate the reduction pace, for example to ¥200 billion, to strike a fine balance between the need to shrink its balance sheet and the need to prevent the lower debt holdings by the central bank from jacking up long-term market interest rates and undermining economic activity.

- Tuesday, June 17

1530-1615 JST (0630-0730 GMT/0130-0230 EDT) BOJ Governor Kazuo Ueda holds a news conference to discuss the board’s decision. He is expected to repeat that the bank will continue raising rates “gradually” as part of its policy normalization process.

In its quarterly Outlook Report issued after the last meeting on April 30-May 1, the board projected that underlying CPI inflation is likely to settle around the bank’s 2% target in the second half of the projection period (fiscal 2025 through fiscal 2027), which is about six to 12 months later than forecast earlier. But Governor Ueda told reporters that it “does not necessarily mean that the timing of the next rate hike will be pushed back in the same way.”

FEELING TRUMP TARIFFS ON AUTOS, METALS

- Wednesday, June 18

0850 JST (2350 GMT/1950 EDT Tuesday, June 17) The Ministry of Finance releases May trade.

Mace News median: exports -4.2% y/y (range -5.0% to -1.4%) vs. Apr +2.0%; imports -8.1% y/y (range -9.9% to -5.2%) vs. Apr -2.2%; trade deficit ¥863.00 billion (range a deficit of ¥1,039.90 billion to a deficit of ¥404.40 billion) vs. a revised ¥115.63 billion deficit in April; ¥1.23 trillion deficit in May 2024; a record shortfall of ¥3,506.43 billion (¥3.51 trillion) in Jan 2023; a record surplus ¥9,906.71 billion (¥9.91 trillion) in Dec 2024.

Japanese export values are forecast to post their first year-on-year drop in eight months in May, down 4.2%, after the pace of increase decelerated to 2.0% in April from 4.0% in March amid the global trade war initiated by Washington. The decrease is expected to be led by declines in automobiles, iron/steel and computer chips in the wake of stiff Trump tariffs.

Import values are expected to slump 8.1% after slipping 2.2% in April and rebounding 1.8% in March. The decrease was likely led by lower purchases of coal, crude oil and iron ore in light of falling global energy markers triggered by slowing demand.

The trade balance is forecast to post a deficit of ¥863.00 billion, widening from a revised ¥115.63 billion deficit in April but narrowing from a ¥1.23 trillion deficit in May 2024. It would be a second straight shortfall.

TECHNICAL PULLBACK IN ORDERS, ALSO TRUMP-DAMPEN

- Wednesday, June 18

0850 JST (2350 GMT/1950 EDT Tuesday, June 17) The Cabinet Office releases April machinery orders.

Mace News median: core orders -11.3% m/m (range -15.0% to -5.4%) vs. Mar +13.0%; +2.9% y/y (range -2.4% to +9.0%) vs. Mar +8.4%

Japanese core machinery orders, the key leading indicator of business investment in equipment, are forecast to post their first drop in three months, down 11.3% on the month, after having unexpectedly soared 13.0% to a more than 17-year high of ¥1.01 trillion in March, which appears to have been caused by a distortion in seasonal adjustments. Weaker export demand is also making firms cautious.

The growth and inflation outlook remains uncertain amid the global trade war initiated by the Trump administration. Plans to digitize and automate operations remain solid but labor shortages and elevated costs are hampering smooth implementation of some of those plans.

Last month, the Cabinet Office projected that core orders would slip back 2.1% on quarter in April-June quarter after rising a solid 3.9% in January-March, led by widespread demand for computers from electric machine and chemical makers as well as from the wholesale/retail and financial sectors.

From a year earlier, core orders, which track the private sector and exclude volatile orders from electric utilities and for ships, are expected to mark their seventh consecutive gain, up 2.9%, following +8.4% the previous month.

COST-DRIVEN INFLATION LINGERS, NOT BACKED BY DEMAND

- Friday, June 20

0830 JST (2330 GMT/1930 EDT Thursday, June 19) The Ministry of Internal Affairs and Communications releases May CPI

Mace News median: total CPI +3.5% y/y (range +3.5% to +3.5%) vs. Apr +3.6%; core CPI (ex-fresh food) +3.6% y/y (range +3.6% to +3.7%) vs. Apr +3.5%; core-core CPI (ex-fresh food, energy) +3.2% y/y (range +3.1% to +3.3%) vs. Apr +3.0%

Consumer inflation in Japan is expected to accelerate further in two of the three key readings in May as the prices for rice remained about double those seen a year earlier in the aftermath of supply shortages and the costs for utilities were up after three-month subsidies for electricity and natural gas ended in March for April bill payments. The upward pressure is partly offset by the year-long price-cutting effect of free high school education that began at a national level on April 1.

The core reading (excluding fresh food) is forecast to post a 3.6% rise on year, the fastest in 28 months (since 4.2% in January 2023), after its annual rate picked up to 3.5% in April from 3.2% in March. The underlying inflation measured by the core-core CPI (excluding fresh food and energy) is seen rising to 3.2% from 3.0%. The year-on-year rise in the total CPI is likely to ease slightly to 3.5% after being flat at 3.6% as fresh vegetable prices have calmed after a recent spike.

The current price rises are not backed by domestic demand (wage-heavy services price hikes are still subdued) but largely pushed up by higher import costs. This means that it is not accompanied by sustained and substantial wage growth and that underlying inflation is still below the Bank of Japan's 2% target, with various measures pointing to an average 1.5%, according to the bank.