BoJ review: Dissenting votes underscore need for continued rate hikes

The BoJ raised its policy rate to 1.25% as widely anticipated, but the 7–2 split vote suggests clear resistance to rate hikes from reflationist members, and market pricing for rate hikes receded, with the yield curve steepening alongside yen depreciation. The current market consensus points to a further hike to 1.50% at the December meeting. While the USD and EUR markets are pricing in roughly a 50% probability of another hike at their respective October meetings, the hurdle remains high for Japan to follow suit with back-to-back rate hikes. Looking further ahead, we think the market will likely price in roughly quarterly rate hikes for the time being, with a strong likelihood of another rate hike in March next year aimed at curbing yen depreciation. With the neutral rate estimated around 2% or slightly higher, the pace of hikes will reasonably slow at some point. However, the two dissenting votes complicate the outlook: after the Cabinet reshuffle, Minister for Economic and Fiscal Pol