Goldman Sachs Predicts BOJ to Keep Rates Unchanged Amid Economic Uncertainty

Goldman Sachs has forecasted that the Bank of Japan (BOJ) will maintain its current monetary policy stance, keeping interest rates unchanged. This prediction comes as economic activity and price indicators in Japan's domestic market continue to show signs of a strengthening virtuous cycle. However, the potential impact of tariff hikes in the future adds a layer of uncertainty.

From a risk management perspective, Goldman Sachs expects the BOJ to keep its policy rate unchanged in June while maintaining its gradual rate hike stance. The next policy rate hike is estimated to occur in January 2026. Regarding the BOJ's mid-term review of its current Japanese government bond (JGB) purchase reduction plan, which ends in March 2026, Goldman Sachs anticipates that the existing plan will remain unchanged. Following this, the BOJ is expected to continue scaling back bond purchases over a one-year period, albeit at a slower pace, ultimately reducing to approximately 2 trillion yen per month. This aligns with the range of forward-looking surveys conducted among market participants by the BOJ and corresponds to the level seen prior to the start of QQE.

The BOJ's decision to keep rates low is driven by the need to prevent a financial crisis, as highlighted by the necessity to continue purchasing Japanese government bonds (JGBs) or at least avoid aggressive selling. This strategy aims to stabilize the financial markets and mitigate potential risks. The BOJ is also considering slowing down the reductions in its bond purchases under its quantitative tightening (QT) plan, which is set to be announced soon. This move is in response to fresh global risks that could impact the Japanese economy.

The BOJ's policy stance contrasts with that of other central banks, which are expected to maintain their pause on rate hikes as the gap between global central banks widens. This divergence in monetary policies reflects the unique economic challenges faced by different regions. The BOJ's decision to stay put on rates is a cautious approach, aimed at ensuring financial stability while navigating global economic uncertainties.

Goldman Sachs' prediction aligns with the broader market expectations that the BOJ will hold rates at the current level during its upcoming policy meeting. This decision leaves open the possibility of tightening later in the year, depending on economic developments and inflation pressures. The BOJ's approach is part of a broader strategy to manage inflation and support economic growth, even as other central banks grapple with their own set of challenges.

The BOJ's decision to stay put on rates is also influenced by the need to address structural headwinds and fiscal support waning. Goldman Sachs has noted that with tariffs set to remain high and structural headwinds persisting, growth is likely to slow further this year. This assessment underscores the importance of the BOJ's cautious approach to monetary policy, as it seeks to balance the need for economic growth with the risks of financial instability.