Bank of Japan Weighs Rate Hike Decision in October

All eyes are on the Bank of Japan (BOJ) as it approaches its monetary policy meeting scheduled for the end of October. Amid growing speculation about a potential interest rate hike, informed sources suggest that the central bank may prefer to wait and evaluate more data before making any decision. This cautious approach reflects the BOJ's concerns about potential global economic risks and the impact of new government policies.

Inflation and Economic Data Support Wait-and-See Stance

Although the Japanese economy has made significant progress in achieving its inflation targets, Bank of Japan officials believe that the current situation does not warrant rapid action. This view is based on the fact that the path of the economy and inflation is largely in line with expectations, suggesting that the likelihood of achieving the targets is gradually increasing. However, the central bank does not rule out the possibility of raising interest rates again before the end of the year, but stresses that there are currently no conclusive factors that would push it to take this step at the October meeting.

Factors Influencing the BOJ's Decision

The Bank of Japan will carefully review economic data and other factors until the last moment before making its final decision. These factors include the dynamics of financial markets, such as the impact of the yen exchange rate on inflation, which is now greater than before. In addition, the full impact of US tariffs has not yet fully appeared in the data, and there is still uncertainty about the course of the US economy and its impact on the Japanese economy.

Impact of New Government Policy

Following the election of Sanae Takaichi as president of the Liberal Democratic Party and Prime Minister, the likelihood of continued easing monetary policy increased, leading to a decline in market expectations for a rate hike at the October meeting. Takaichi is known to support easing monetary policies, and her economic advisor Etsuro Honda stated that a rate hike in October would be premature, but indicated that a rate hike in December would be acceptable.

Cooperation Between the Central Bank and the Government

Bank of Japan officials stressed that the central bank will continue to work closely with the government, but emphasized that monetary policy decisions will depend entirely on an assessment of progress in achieving the price stability target. Some officials pointed out that a decision on raising interest rates could be made as soon as an initial assessment of the economic and fiscal policies that the new government may implement is carried out.

Market Expectations

Money market rates suggest that traders see a 25% chance of a rate hike at the October meeting, although this has edged up slightly this week, it is still well below the roughly 70% at the end of last month. Meanwhile, the probability of a rate hike at the December meeting has risen to about 38%.

Caution and Avoiding Conflict with the Government

Many analysts watching the Bank of Japan believe that the central bank is reluctant to take any immediate action after Takaichi took office, in order to avoid repeating the conflicts that occurred in the past due to raising interest rates. In addition, Bank of Japan Governor Kazuo Ueda did not provide any strong signals about a change in monetary policy in his last speech before the policy meeting, suggesting that he prefers to maintain the status quo.

Growth and Inflation Forecasts

The quarterly economic outlook report, which will be released in conjunction with the monetary policy statement, is not expected to make significant changes to the overall assessment of the economy. However, some officials believe that a slight upward adjustment should be made to the economic growth forecast for the current fiscal year, given that second-quarter GDP data was better than expected. Three months ago, the Bank of Japan forecast economic growth of 0.6% for this fiscal year, slightly below the private sector median forecast of 0.8%. According to informed sources, the central bank will not make significant adjustments to inflation forecasts, but it may leave room for slight adjustments if committee members believe that the recent trend of falling oil prices will continue.