Mizuho: The Bank of Japan still needs time to assess the impact of tariffs, and the end of the year is the earliest opportunity for interest rate hikes

According to the Zhitong Finance APP, Mizuho has released a research report stating that the end of the year is considered the earliest opportunity for the Bank of Japan to raise interest rates. Mizuho pointed out that the summary of the Bank of Japan's monetary policy meeting in July will be released on August 8. In terms of monetary policy, the summary presents a relatively hawkish view on prices, including "unlike previous phases, both actual inflation and inflation expectations have been continuously rising in the current phase, accompanied by increases in corporate profits and wages," and "the second-round effects of price increases are more likely to occur, and core inflation is rising." Some council members—likely hawks—advocate for an early interest rate hike, arguing that "from a risk management perspective, the Bank of Japan should timely raise the policy interest rate," and "the central bank needs to remember not to be overly cautious to the point of missing the opportunity to raise interest rates."

On the other hand, many opinions still indicate that the Bank of Japan intends to take a considerable amount of time to assess the economic impact of U.S. tariffs. These views include, "even if Japan and the U.S. reach an agreement on tariffs, the baseline scenario remains unchanged, namely that Japan's economic growth will slow down, and the improvement of core CPI inflation will be temporarily delayed," and "there is currently insufficient data from various economies to accurately assess the impact of trade policies. Therefore, the Bank of Japan should make policy decisions when more data becomes available."

Additionally, some opinions specifically mention how long it will take to assess the impact of tariffs. This was not mentioned by Bank of Japan Governor Kazuo Ueda at the press conference. Relevant opinions state, "At least two to three months are needed to assess the impact of U.S. tariff policies. If the U.S. economy bears a greater shock than expected, the downward impact on the Japanese economy may remain minimal. In this case, the Bank of Japan may be able to exit its current wait-and-see stance as early as the end of the year."

Mizuho stated that news reports emphasized the last part of this commentary ("exit the wait-and-see stance as early as the end of the year") and interpreted it as a hawkish view, but this timeline does not necessarily mean that the Bank of Japan is eager to raise interest rates. The "at least two to three months" assessment period mentioned in the statement, along with the "exit the wait-and-see stance as early as the end of the year," suggests that the next interest rate hike by the Bank of Japan will not occur before December, which seems to reduce the likelihood of a rate hike in September or October (but it should be noted that the expression "two to three months" does not completely rule out the possibility of a rate hike in October). Compared to the market's current estimate of about a 40% probability of a rate hike in October, this statement appears more dovish.

Several opinions suggest that the Bank of Japan should shift its focus from core inflation to actual inflation, including, "the central bank is at a stage where it should shift its core communication regarding price trends from core inflation to actual price trends, price outlook, output gap, and inflation expectations," and "as core inflation approaches 2%, the importance of actual inflation is gradually increasing" (while also noting that "although it is difficult to measure precisely with any specific indicator, core inflation is an important concept for the central bank in implementing monetary policy").

These views seem to acknowledge that Japanese inflation has been running above 2%, carrying a certain hawkish tone. However, it should also be noted that given the expected observed inflation will significantly decline due to the base effect of rice and other food prices fading, as well as the dollar-yen exchange rate peaking, placing greater emphasis on actual inflation may instead become a constraint on interest rate hikes In summary, Mizuho believes that the key factor in deciding whether to raise interest rates again will be the extent of inflation decline by the end of 2025—this is the earliest time point that the Bank of Japan seems to consider for a possible rate hike. The bank still believes that during the Bank of Japan's assessment of tariff impacts, the inflation rate is more likely to decline significantly, making rate hikes more difficult.

Additionally, Mizuho stated that U.S. employment data indicates that the labor market is beginning to soften, which should help the Federal Reserve resume rate cuts. Furthermore, considering that Stephen Miran, who is viewed as dovish, is expected to succeed Federal Reserve Governor Adriana Kugler, the likelihood of a rate cut in September has further increased. The market has priced in a probability of over 90% for a rate cut in September. Mizuho believes that while there is limited room for the market to further digest rate cut expectations, it is hard to imagine that these expectations will easily dissipate.

It is worth mentioning that Mizuho's Japanese counterpart, Nomura Securities, has also brought forward its expectations for a Federal Reserve rate cut to September, citing signs of slowing inflation and initial cracks in the labor market. Nomura expects the Federal Reserve to cut rates by 25 basis points in September, followed by another 25 basis points cut in December and March 2026. The bank believes that the likelihood of a 50 basis points cut in September is low, as "despite the labor market slowing, there are almost no signs of pressure, and broader financial conditions remain accommodative."