Bank of Japan is likely to stay course with a rate hike in December or January, analysts say

After a messy election, the Bank of Japan decided to hold its benchmark policy rate at 0.25%, as expected. However, analysts claim that the central bank’s emphasis on raising rates and normalising monetary policy has not changed.

With only slight modifications, the BOJ board upheld its three-year inflation forecasts, indicating that the economy is developing as anticipated.

The governor of the central bank, Kazuo Ueda, stated at a press conference after Thursday’s decision that the U.S. economy is becoming less risky, which suggests that the timing of another interest rate hike may soon be favourable. Following Ueda’s remarks, the value of the yen increased to 151.9 versus the dollar.

Stefan Angrick, associate director and senior economist at Moody’s Analytics, described the tone of the BOJ’s Outlook Report as being “moderately” hawkish. “Inflation and growth projections from the central bank still indicate that rate hikes are imminent,” he stated.

In reference to the yearly wage talks between labour unions and workers in Japan, Angrick continued, “The only question really is timing, and with the yen weakening still, my money will be on a rate hike before the end of the year, and what happens next year will depend on the Shunto or spring wage negotiations.”

The outlook report did mention that prices could be skewed “to the upside for fiscal 2025,” which analysts believe is a reference to worries about the yen’s depreciation.

Monday saw the yen fall roughly 1% to a three-month low after the ruling Liberal Democratic Party suffered its worst election defeat in 15 years. The value of the yen in relation to the dollar was 152.27 on Friday morning.

Large Japanese companies with global operations typically gain from a weaker yen because it increases the value of profits returned from overseas. On the other hand, a weaker yen puts pressure on households by increasing the price of imported food and energy.

The BOJ’s outlook report also emphasised the importance of keeping a close eye on global markets and economic developments, highlighting its focus on risks that could affect a fragile domestic recovery when deciding when to tighten policy.

According to Goldman Sachs senior Japan economic adviser Akira Otani, the BOJ is expected to raise interest rates in January. As these outlook risks highlight, the timing of the next BOJ rate hike could be heavily impacted by international events, the exchange rate, and its impact on the Japanese economy, Otani added.

Marcel Thieliant, head of Asia Pacific at Capital Economics, told CNBC that the supplementary budget’s possible passage is the next important development in domestic politics.

In order to finance an economic aid package, Prime Minister Shigeru Ishiba said during the election campaign that his government plans to create a supplemental budget for the fiscal year 2024. It would be more than the 13 trillion yen ($84.6 billion) allotted in the supplemental budget from the previous year, he continued.

However, if the administration chooses to implement the recommendations made by the Democratic Party of the People to lessen the growing burden of energy costs, the budget size might go up even more.

On November 11, elections will be held to choose a prime minister. If he holds on to power, Ishibia would then form his second cabinet before flying to Brazil to attend a meeting of the Group of 20.

When Ishiba returns, he is expected to hold an extraordinary Diet session, during which he hopes to pass the supplementary budget plan, according to local news.

“The Diet should be convening on 11th November, and typically the session runs until mid-December, so that should give them enough time to pass the supplementary budget,” Thieliant said. Then the BOJ could hike rates that same month.

“If they don’t. if political issues cause that to be postponed for some reason. Then, since that would raise a lot of doubts about the financial situation, I would probably rule out a rate hike in December.