Predicting the BoJ's September stance using the swap market

Is the Bank of Japan set to resume interest-rate "normalization" soon? Swap markets suggest not yet, even with inflation measures remaining stubbornly above target amid pricey food (especially rice).

The central bank meets on Sept. 18-19. A year and a half ago, it had still not exited its negative interest rate policy; today, the key interest rate stands at 0.5%, its highest in many years.

We've charted JPY Overnight Indexed Swap Rates (OIS) for more insights. OIS contracts can be seen as the market's wagers on the future of interest rates. Typically, the JPY OIS tends to spike prior to a rate hike (as we can see just before the August 2024 and January 2025 tightening episodes) and plunge before a cut. We have seen a small increase, but nothing like the surge seen in late 2024. Three-month OIS rates have hovered just above the BoJ key rate's level of 0.5% since mid-August.

Differentials are relatively flattish between 1-, 3- and 6-month OIS rates today. (Our second chart examines other moments in time.) This suggests increasing uncertainty on the timing of the next rate hike.

It's also instructive to consider the period before and after "Liberation Day," circled in blue. A BoJ rate hike seemed very likely until Donald Trump upended assumptions on global trade.

Our final charts consider the sticky inflation in 2025 that would have otherwise provided momentum for continued rate hikes. We further compare these indicators to CEIC's proprietary nowcasts and the high-frequency SRI-Hitotsubashi Consumer Purchase Price Index,* which also show above-target, sticky inflation.

Consumer price inflation (and its core variant) might be moderating somewhat, though staying well above the 2% target set by the BoJ.

(To be sure, some observers view that the run-up in food prices will be temporary and, thus, inflation concerns are excessive. Japan's core inflation measure strips out fresh food, but not some of the foodstuffs that have seen the steepest price increases, e.g. rice.)

Economists are still predicting a 25 basis-point increase from the BoJ in the final quarter of the year, according to press reports. As for economic growth, it's seen as resilient enough to eventually justify a rate hike. Japan had a seasonally-adjusted 0.5% pace of quarter-on-quarter GDP growth in Q2 2025, up from 0.1 in Q1.

*This weekly measure is compiled by Hitotsubashi University and is based on data from point-of-sale terminals at thousands of retail outlets, including supermarkets and drugstores.

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