BoJ likely to keep rates unchanged in March to support financial stability and avoid premature tightening. Revised Q4 GDP indicates risks to a sustained recovery from weak domestic demand. Long-end JGBs have sold off sharply, likely on sentiment, higher Bund yields and end-FY seasonality. 10Y yield differentials have broken below the lows of September, signalling more USD/JPY downside, Standard Chartered's economists Chong Hoon Park and Nicholas Chia note. 

Taking a breather

"We expect the Bank of Japan (BoJ) to keep rates unchanged on 19 March, primarily to support financial stability and avoid any premature tightening, which could weaken domestic spending. The central bank is likely to gradually hike rates starting Q2-2025, which would help address inflationary risks without undermining growth, in our view. Q4 GDP grew an annualised 2.2%, driven by exports, but domestic demand remained weak." 

"In January, industrial production contracted (-1.1% m/m), PMI remained below 50, and real wages fell (-1.8% y/y), limiting consumption. Core inflation excluding food and energy (2.5% y/y) has exceeded the BoJ’s target since last July, fuelled by a weak JPY and high energy prices."

"Past instances show that rate hikes by the BoJ have led to economic slowdowns, notably in the 1990s and in 2007. We, therefore, expect the BoJ to hold rates in March before cautiously tightening in Q2-2025. A sudden hike could also unwind JPY carry trades, disrupting global markets. The BoJ will also look to manage external pressure from the US while safeguarding domestic economic resilience. Clear communication with financial markets will be crucial to prevent volatility."