- US/Japan: Brent crude prices slipped below USD80/bbI on hopes of Middle East de-escalation; US trade uncertainty lingers as a new legal battle for Section 301 tariff is underway; BOJ Ueda delivered a slightly hawkish message following a July pause; we continue to expect 25 bps hike each in 4Q26 and 2Q27
- China: Policymakers struck a dovish tone at both the July Politburo meeting and the PBOC’s 2H26 Work conference against a backdrop of weak data points
- Taiwan: GDP growth has moderated to 12.9% y/y in 2Q26 from its peak but remains strong; the GDP data should provide sufficient confidence for the central bank to hike rates in 2H26
- Indonesia: Markets are awaiting the appointment of the new BI Governor after Chief Warjiyo stepped down last week; the growth-inflation mix coupled with stability in the rupiah makes the case for the BI to maintain its rates this month
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US/Japan: Middle East diplomacy, US trade uncertainty, and BOJ policy outlook. Brent crude prices slipped below USD80/bbI for the first time in four weeks, driven by hopes that the US and Iran have stepped back from attacking each other and resumed negotiations. Following last week’s underwhelming FOMC meeting, the futures markets cut the probability of a September Fed hike from 72% to 58%. While 44k gains in July ADP private payrolls (released on 5 August) fell short of expectations, the market awaits nonfarm payroll and unemployment data due on 7 August. Market consensus expects the former to increase to 80k in July from June’s 57k whilst the latter to remain unchanged at 4.2.
Meanwhile, the US Court of International Trade reported that the Trump administration had refunded about USD100bn or 60% of the Liberation Day tariffs collected, following the US Supreme Court’s ruling against the tariffs under the International Emergency Economic Powers Act in February. A new legal battle is already underway. A coalition of 25 Democratic-led states has sued the administration over its latest tariffs imposed on 60 trading partners under Section 301 of the Trade Act of 1974, under the pretext of forced labour practices.
The Bank of Japan kept the overnight call rate unchanged at 1.00% at its 31 July meeting, in an 8-1 vote. In its updated economic projections, the BOJ revised its FY26 GDP forecast slightly higher to 0.6% from 0.5%, while lowering its FY26 core CPI forecast to 2.5% from 2.8%. Governor Ueda delivered a slightly hawkish message during the press conference. He noted that the underlying inflation trend is now very close to the 2% target, and that policy can be adjusted before the inflation target is fully achieved. He also highlighted the need to closely monitor upside inflation risks, given that exchange rate movements now have a greater impact on inflation than in the past. His remarks echo earlier media reports suggesting that the BOJ may be willing to raise interest rates at a faster pace than the current expectation of one hike every six months.
We continue to expect the BOJ to deliver its next 25 bps rate hike in 4Q26, most likely at the October meeting when it releases its next set of economic outlook updates, taking the policy rate to 1.25%. We also expect another 25 bps hike in 2Q27, bringing the policy rate to 1.50%, although we acknowledge an increasing possibility that this move could be brought forward to 1Q27. Wage growth has remained above 3% for four consecutive months, reinforcing the BOJ's confidence that achieving sustained 2% underlying inflation is within reach. Meanwhile, persistent yen weakness continues to increase the risk of inflation exceeding its target. The BOJ's preferred measure of underlying inflation—which excludes fresh food, energy, and institutional factors—stood at 2.0% y/y in June. Headline CPI is likely to rise above 2% in July and remain above target through 2H26. We also expect Japan's economic growth to remain resilient, supported by the AI-driven export boom and robust wage growth, which should underpin private consumption.
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