While the BoJ reiterated its intention to raise rates when its inflation outlook is realised, it also cited the high level of uncertainties ahead. — Bloomberg
TOKYO: The Bank of Japan (BoJ) kept its benchmark interest rate unchanged after uncertainties increased over the outlook for the economy and the stability of the government after the ruling coalition’s worst electoral result since 2009.
Governor Kazuo Ueda and his fellow board members maintained the unsecured overnight call rate at around 0.25%, according to its statement yesterday.
The result was expected by all but one of 53 economists surveyed by Bloomberg.
The weakest election outcome in 15 years for the ruling Liberal Democratic Party saps its power to push through economic measures and nimbly coordinate with the BoJ. The US presidential vote also looms large next week, leaving investors on guard for potential volatility in markets.
The central bank said it needs to pay attention to the course of overseas economies and the US economy in particular.
While the BoJ reiterated its intention to raise rates when its inflation outlook is realised, it also cited the high level of uncertainties ahead.
The BoJ continued to say it expects the underlying price trend to be consistent with its 2% stability target in the latter half of its three-year projection period ending in March 2027.
It toned down its language on the risks for its inflation forecast for the year ending March 2025, but stuck to its view that there is upside risk for its price view for the following year.
That’s an indication that despite all the current uncertainties, the central bank sees the longer term trend on track with a possibility it might strengthen, a view that supports the likelihood of further rate hikes to come.
“The BoJ is saying that overall it is on track to continue with normalisation,” said Toru Suehiro, chief economist at Daiwa Securities.
“I personally don’t think that instability will keep the BoJ from raising the rate. If the yen continues to weaken, the BoJ may as well hike in December, and today’s outlook report didn’t rule out that possibility.”
Risk of higher inflation
“The BoJ can’t wait too long to pare stimulus further. With wages and prices heating up, and the yen facing renewed downward pressure, the risk of inflation overshooting the 2% target could increase,” said Bloomberg economist Taro Kimura.
The yen fluttered immediately after the policy announcement before strengthening against the dollar. It was at 153.08 at around 12:20pm in Tokyo.
The currency is seen as a driving factor for the timing of the BoJ’s next policy action, as a further drop could boost inflationary pressures when households are already struggling with the rising cost of living.
If the yen hits 155 against the dollar, Prime Minister Shigeru Ishiba is likely to signal acceptance for a rate hike, according to the median estimate of economists in a Bloomberg survey. While the result of the US election is likely to send ripples through markets, an expected Federal Reserve rate cut next week may offer help for the yen.
Ishiba’s coalition lost its majority in the lower house Sunday, prompting the premier to seek cooperation from opposition party members to continue in power. Further out Ishiba may also need a buy-in from other parties to get legislation passed, including new funding for an economic package, a national budget and tax reforms.
Key player
One key player for Ishiba is Yuichiro Tamaki, the head of the Democratic Party for the People. Tamaki said Tuesday that there should be no sudden monetary policy shift now and the BoJ’s rates could be adjusted if there are expectations of wage growth near 4% next year, going well above inflation at around 2%.
With 87% of BoJ watchers forecasting the next rate hike will come by early next year, analysts and traders will be scrutinising Ueda’s every word for a hint of whether he is looking to move in December or January. — Bloomberg
