BOJ Rate Hike Speculation Amidst Political Shifts: An October Surprise?

Will the Bank of Japan Hike Rates in October?

A former Bank of Japan (BOJ) official, Tomoyuki Shimoda, stated on Thursday that even if Sanae Takaichi, a proponent of aggressive monetary easing, wins the ruling party leadership race and becomes the next Prime Minister, the BOJ might still raise interest rates in October. Takaichi is currently considered a frontrunner in the Liberal Democratic Party (LDP) leadership election scheduled for October 4th. She's known for her public opposition to BOJ rate hikes and her calls for increased spending to revitalize the Japanese economy. The prospect of her becoming the next Prime Minister has led some market participants to buy the Yen and Japanese government bonds, believing it could hinder the BOJ from raising interest rates. However, Shimoda, who previously worked in the BOJ's monetary affairs department, anticipates that the leadership contest, including the possibility of Takaichi winning, will have a limited impact on monetary policy. "While she may advocate for increased fiscal spending, I doubt Takaichi can implement policies that could weaken the Yen," Shimoda said in an interview.

The Yen's Influence on Monetary Policy

A weaker Yen would boost exports, but it has been a source of concern for policymakers as it raises import costs and contributes to inflation far exceeding the BOJ's 2% target. Shimoda said that the US dollar rising above 150 Yen could also draw complaints from the US government, which is pursuing a weaker dollar policy to boost US exports.

Factors Influencing a Rate Hike Decision

He added that if stock prices remain strong and the “Tankan” business sentiment survey, scheduled for October 1st, does not significantly deteriorate, the BOJ is likely to raise interest rates at its October 29-30 meeting. "Corporate profits are good, and a structural labor shortage will push up wages. Continued rising food costs will also keep inflation high. The environment is forming for a rate hike," said Shimoda, who currently teaches at Rikkyo University in Japan. The BOJ is widely expected to keep interest rates unchanged at 0.5% at its two-day meeting ending on Friday. A foreign news agency poll of economists last month showed that most expect the BOJ to raise interest rates again by 25 basis points before the end of the year, but they differed on timing, with the primary focus on October and January of next year.

Takaichi's Economic Policy and the BOJ's Direction

Takaichi is known for advocating a combination of fiscal and monetary stimulus in the style of "Abenomics." Under the leadership of the late Prime Minister Shinzo Abe, the BOJ launched a massive asset purchase program in 2013 to pull Japan out of deflation. Her main competitor is Shinjiro Koizumi, whose views on BOJ policy are less well known. It's worth noting that the BOJ last year exited its decade-long massive stimulus measures and raised short-term interest rates to 0.5% in January, believing Japan was on the verge of permanently achieving its 2% inflation target. With inflation having exceeded 2% for more than three years, the BOJ has indicated its readiness to continue raising interest rates. The Yen's movements have historically had a significant impact on the BOJ's decisions. Its exit from ultra-loose policy and the rate hike to 0.25% last year coincided with the Yen plunging to a near two-decade low, prompting political calls for higher interest rates.