[TOKYO] The Bank of Japan is widely expected to keep interest rates steady on Thursday, but reiterate its resolve to continue pushing up still-low borrowing costs to fend off the risk of further yen falls that could broaden inflationary pressure.
Yen moves will loom large after remarks by US Treasury Secretary Scott Bessent calling for speedier rate hikes to avoid weakening the currency too much, which may affect the BOJ‘s communication on the future pace of rate hikes, analysts say.
While data so far has shown the economy weathering the hit from US tariffs, Governor Kazuo Ueda has warned that the impact could intensify in coming months.
The board is split between hawks who see conditions ripe to raise rates, and doves like Ueda who prefer awaiting more data on the extent of damage from slowing US growth and President Donald Trump’s tariffs.
Uncertainty over the impact of tariffs also overshadowed discussions at the US Federal Reserve, which delivered another interest rate cut on Wednesday but by a split vote. Its chair Jerome Powell pointed to “strongly differing views” among his colleagues about the appropriate future policy path.
New political challenges
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Politics also complicates the BOJ‘s decision. Markets reduced bets of an October rate hike after last week’s inauguration of new Prime Minister Sanae Takaichi, who is known as an advocate of loose monetary policy.
With the BOJ having had little time for dialogue with the new administration, many market players expect it to keep interest rates steady at 0.5 per cent at its two-day policy meeting concluding on Thursday.
Hawkish board members Naoki Tamura and Hajime Takata are likely to dissent and repeat their proposals, made in September, to hike rates to 0.75 per cent – a level unseen in three decades.
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“Admittedly, we agree that there is a clear case for higher interest rates in Japan,” said Jonas Goltermann, deputy chief markets economist at Capital Economics.
“But we doubt the BOJ would be willing to risk the wrath of newly anointed PM Takaichi, whose stated preference is for a continued dovish monetary policy stance.”
If rates are on hold as the market projects, investors will focus on any clues from Ueda’s post-meeting news briefing on the timing and pace of future rate hikes.
“The BOJ probably sees no rush in raising rates as long as it can do so by January next year as markets expect,” said Mari Iwashita, executive rates strategist at Nomura Securities.
“With a near-term hike seen as a given, markets are shifting their attention to the BOJ‘s guidance on how far it could eventually push up interest rates.”
A majority of economists polled by Reuters expect the BOJ to raise rates either in October or December, with nearly all projecting a hike to 0.75 per cent happening by end-March.
The BOJ last year exited a decade-long, massive stimulus programme and raised rates to 0.5 per cent in January on the view Japan was close to durably hitting its 2 per cent inflation target.
Conflicting pressures
While Ueda has signaled the bank’s readiness to keep raising rates, he has preferred treading cautiously on the view the hit from US tariffs could derail a cycle of rising wages and prices – a prerequisite for policy normalisation.
At the meeting, the board will also conduct a quarterly review of its growth and inflation forecasts.
Sources have told Reuters the BOJ may revise up its economic growth forecast for the current fiscal year and maintain its view the economy will remain on course for a moderate recovery.
With hawkish members warning of inflationary risks, the board may debate changing language on the course and timing for when underlying inflation is likely to approach its target.
In the current report issued in July, the BOJ said it expects underlying inflation to hit 2 per cent in the latter half of the three-year projection period through March 2027. REUTERS
