SMFG calls for clear BOJ normalisation roadmap after June hike

The Bank of Japan should provide a clear roadmap for policy normalisation following an anticipated interest rate increase in June to help stabilise the government bond market, according to Arihiro Nagata, global markets chief at Sumitomo Mitsui Financial Group.

Speaking to Reuters, Nagata said he expects the BOJ to raise interest rates at its June 15-16 policy meeting and stressed that the central bank's communication regarding future policy moves will be closely watched by financial markets.

Focus on policy guidance

"The BOJ should raise interest rates in June, and I expect it will surely this time," Nagata said in an interview, cited in a Reuters report.

According to Nagata, the most important aspect of the upcoming policy meeting will not only be the rate decision itself but also the clarity of the central bank's message regarding its longer-term policy trajectory.

Nagata noted that financial markets have already priced in further monetary tightening.

He said it would be sufficient for the BOJ to indicate that its outlook broadly aligns with prevailing market expectations.

He added that investors are already anticipating nearly two rate hikes this year, along with the possibility of additional policy tightening beyond that period.

Bond yields and yen remain in focus

Nagata's comments come as Japan's government bond market faces increasing scrutiny.

The benchmark 10-year government bond yield has climbed to its highest level in three decades, while the Japanese yen has weakened again toward the closely watched 160-per-dollar level despite substantial intervention efforts.

The developments have intensified market attention on how the BOJ intends to proceed with the gradual normalisation of monetary policy after years of ultra-loose settings.

The central bank left interest rates unchanged in April but strongly signaled the possibility of a near-term rate increase amid growing inflationary pressures.

The Middle East conflict adds complexity

Nagata said the conflict in the Middle East has complicated the BOJ's policy decisions regarding both the timing and pace of future interest rate increases.

Higher energy costs resulting from the conflict present a challenge for policymakers.

While rising energy prices contribute to inflation, they also place additional pressure on Japan's import-dependent economy.

This dual impact has made it more difficult for the central bank to balance inflation management with broader economic considerations.

Debate over bond purchase reductions

At its June meeting, the BOJ is expected to review its current bond tapering programme, which runs through March next year, and present a new plan covering fiscal 2027.

Markets are not expecting any changes to the existing tapering framework.

Instead, investor attention is centred on whether the BOJ will continue reducing its monthly bond purchases during fiscal 2027 or maintain the current pace.

Nagata said SMFG has recommended that the central bank stop further tapering and maintain monthly bond purchases at approximately 2.1 trillion yen ($13.15 billion) starting in April next year.

Reducing purchases to that level "would be manageable without causing stress in the market, while allowing market functioning to recover," he said.

Investment strategy

Discussing SMFG's own portfolio management approach, Nagata said the company would consider purchasing long-term government bonds if yields rise to around 3%.

However, he emphasised that any investment decisions would be made cautiously, with close attention paid to overall supply and demand conditions in the bond market.

His comments underscore the delicate balance facing both policymakers and market participants as Japan navigates the next phase of monetary policy normalisation amid rising yields, inflation concerns, and ongoing global uncertainties.