June Japan and U.S. central bank meetings draw attention, but markets look to 'what comes next'

The Bank of Japan (BOJ) and the U.S. Federal Reserve will hold pivotal policy meetings next week. The BOJ's Monetary Policy Meeting on June 15-16 is widely expected to deliver a policy shift, while the Federal Open Market Committee (FOMC) on June 16-17 marks the first under the new Wawsh administration. While both events are critical, the market's true focus lies on what comes next. This analysis forecasts market developments through a cross-market lens, taking a comprehensive view of equities, currencies, and bonds.

- Can BOJ Governor Ueda signal continued rate hikes?

Following BOJ Governor Kazuo Ueda's speech on June 3, a June rate hike has been largely priced in by the market. While the hike could have passed solely with the backing of the five hawkish board members who have already voiced their views, the likelihood has increased that the move will be approved 8-1, or even unanimously, with the inclusion of the three executive members.

Governor Ueda's rhetoric shifted from balancing the dual risks of economic slowdown and rising prices to a stance emphasizing inflation vigilance. Despite his hawkish tone, the yen-strengthening effect was short-lived, with the dollar-yen pair quickly recovering to 160 yen. The June rate hike appears thoroughly discounted, proving insufficient on its own to curb yen weakness.

The market's focus at next week's meeting has moved past the rate hike itself. Even if a hike is delivered, the impact will be limited unless it reaches 0.50%, as anything less is already baked into prices. Should the BOJ's hawkish forward guidance disappoint, the dollar-yen pair could easily break further above 160 yen.

The crucial factor is how clearly the policy decision and the governor's press conference signal a sustained rate-hike trajectory. Raising the policy rate to 1.00% would approach the lower bound of the BOJ's estimated neutral rate of 1.10% to 2.50%, making it essential for the central bank to emphasize that the terminal rate remains far off.

To arrest yen weakness and rising long-term yields, the BOJ must shatter the market perception that its tightening cycle will be slow and capped. Signalling that the current pace of hiking once every six months could accelerate if necessary would be effective. Emphasizing independence from the Takaichi administration?which is perceived as cautious on rate hikes?would also deliver a significant market impact.

Furthermore, the governor faces scrutiny over plans to reduce Japanese government bond (JGB) purchases. Although an increase in calendar-base JGB market issuance for the fiscal 2026 supplementary budget was avoided due to higher-than-expected tax revenues in the previous fiscal year, deficit-financing bond issuance continues. While any slowdown or pause in tapering is unlikely until after April 2027, minimizing any immediate impact, any impression of fiscal monetization could trigger further yen selling.

- FOMC also faces risk of division

The FOMC is similarly focused on its next moves. While a policy hold is widely anticipated this week, as the first meeting chaired by Wawsh, attention centers on future policy bias?whether toward cuts or hikes?and potential shifts in communication strategy.

Speculation that Wawsh might lean toward rate cuts persists. His past commentary emphasizes trimmed-mean indices to gauge underlying inflation and highlights AI-driven productivity gains. While his advocacy for shrinking the Federal Reserve Board's (FRB) balance sheet represents a tightening measure, trimmed-mean gauges often run lower than headline inflation, and productivity gains act as disinflationary forces, both of which could provide ammunition for a dovish pivot.

Conversely, a growing number of Federal Reserve officials remain vigilant over sticky U.S. inflation. Inflation has exceeded the central bank's 2.00% target for over five years, and inflation expectations have recently ticked up alongside rising gasoline prices. The economy remains resilient; the Beige Book released on June 3 showed economic activity expanding in 10 of the 12 districts, with most regions reporting higher inflation rates than in the previous period.

Furthermore, the May U.S. employment report released on June 5 showed nonfarm payroll growth beating expectations, alongside upward revisions to March and April data. This suddenly revived expectations for U.S. rate hikes later this year. While U.S. equities, particularly tech shares, fell sharply on the news, the macro environment is gradually aligning toward further tightening.

Meanwhile, President Donald Trump has renewed his demands for rate cuts after temporarily shelving the rhetoric. This leaves the new chairman with the challenge of forging a consensus around inflation vigilance or potential hikes. At this meeting, former Chair Jerome Powell will participate as a board member, replacing Miran, a staunch advocate for rate cuts. Although Powell has dismissed notions of acting as a shadow chairman, his presence as a governor remains formidable.

Should Wawsh aggressively push for rate cuts, he risks becoming isolated within the central bank, or seeing Powell emerge as a powerful counterweight, triggering internal division. Such a scenario could spark a sharp dollar selloff and a surge in U.S. Treasury yields.

Traditionally, Fed chairs have used post-meeting press conferences to signal upcoming policy moves. However, Wawsh has hinted at altering this communication style. While the June meeting typically features the release of the Summary of Economic Projections (Dot Plot), any omission of policy guidance combined with a postponement of the Dot Plot would leave investors in the dark, potentially triggering extreme market volatility.

- Market outlook: four scenarios

With numerous uncertainties surrounding next week's central bank meetings in Japan and the U.S., market reactions are difficult to project. Below are four potential scenarios combining the policy trajectories of the BOJ and the Fed, where "hawkish" denotes signalling future rate hikes and "dovish" signals a pause or cuts, along with the projected impact on the dollar-yen exchange rate:

1) BOJ hawkish (yen strengthening) + Fed hawkish (yen weakening) = dollar-yen stalemate

2) BOJ hawkish (yen strengthening) + Fed dovish (yen strengthening) = yen appreciation

3) BOJ dovish (yen weakening) + Fed hawkish (yen weakening) = yen depreciation

4) BOJ dovish (yen weakening) + Fed dovish (yen strengthening) = dollar-yen stalemate

The most hazardous scenario for Japan is the third combination: a dovish BOJ paired with a hawkish Fed. With both forces aligned against the currency, yen depreciation could accelerate. This would shift focus to whether Tokyo will step in with yen-buying intervention, though fighting the fundamental flow yields limited results. Even if authorities intervene in the lower 160 yen range, capping the rebound in the upper 150 yen range, yen weakness would likely resume once the initial shock fades.

Conversely, the second scenario?a hawkish BOJ and a dovish Fed?would trigger yen gains. Short-covering would likely accelerate given heavy speculative net-short yen positioning. However, structural yen-selling factors, including outward foreign securities investment and trade deficits, remain intact. Unless the BOJ adopts an aggressively hawkish stance, the downside for the dollar-yen pair is likely limited, potentially hitting a floor in the lower 150 yen range.

The impact on Japanese equities will differ from the currency market. A dual hawkish outcome (Scenario 1) would likely trigger a market correction, while a dual dovish result (Scenario 4) would fuel further gains. Under Scenario 2 (hawkish BOJ/dovish Fed), Japanese stocks might suffer an initial knee-jerk correction on yen appreciation but should steadily recover as global markets cheer the Fed's dovish stance. Scenario 3 would produce the opposite effect.

In terms of sector rotation, a rising interest rate environment will benefit banking shares while weighing on real estate equities. High-growth tech shares, particularly AI-related names, are unlikely to see their long-term prospects derailed by a modest 0.25% rate hike. However, if stubborn inflation necessitates a prolonged tightening cycle, investors should exercise caution, as a major correction could hit tech shares and the broader market.

Looking further ahead, the subsequent round of policy meetings will feature the FOMC on July 28-29, immediately followed by the BOJ on July 30-31. This specific sequence of the Fed preceding the BOJ will offer another compelling dynamic for markets.

◇Daiki Iga

Financial and economic journalist. He is currently a freelance writer after serving as a reporter for stock market publications and Reuters. He provides daily commentary on financial markets and macroeconomic trends on his blog, the Tokyo Chroma Report.

Source: MINKABU PRESS

*Translated by generative AI. Click here for the original article.