After concluding its two-day monetary policy meeting on October 31, the Bank of Japan (BOJ) decided to keep its benchmark interest rate steady at 0.25%, as expected by markets. Analysts, however, indicate that the BOJ remains focused on normalizing monetary policy, particularly through future rate hikes.
Economic Outlook Supports Rate Hike Expectations
The BOJ’s latest economic outlook report included minor adjustments to its inflation projections over the next three years, reflecting an economy that is progressing in line with expectations. BOJ Governor Kazuo Ueda, at a press conference following the decision, noted that risks surrounding the U.S. economy have been easing. This positive outlook hints that conditions may soon favor another rate hike in Japan. Following Ueda’s comments, the yen strengthened briefly, reaching 151.9 against the dollar.
Stefan Angrick, Senior Economist at Moody's Analytics, described the tone of the BOJ’s report as "moderately hawkish." He stated, “If you look at the central bank’s projections for growth and inflation, those still suggest that rate hikes are on the horizon. The main question now is timing, and with the yen still weak, I would expect a rate hike before year-end. Next year’s policy will likely depend on the Shunto, or spring wage negotiations.”
The Double-Edged Impact of Yen Depreciation
The BOJ’s outlook report flagged “upside risks to prices for fiscal 2025,” largely due to concerns about a weakening yen. The yen has fallen significantly in recent months and reached a three-month low after the ruling Liberal Democratic Party suffered its worst election loss in 15 years.
A weaker yen can benefit large Japanese corporations with global operations, as it increases the value of profits brought back from overseas. However, the downside is that a weaker yen makes imported energy and food more expensive, which adds financial pressure to Japanese households.
Timing for a Rate Hike Depends on External and Domestic Factors
The BOJ report also highlighted the need to closely monitor global economic trends to assess their potential impact on Japan’s recovery. Akira Otani, Senior Economic Advisor for Japan at Goldman Sachs, predicted that the BOJ could opt for a rate hike in January. He added that the timing of the rate hike depends on developments abroad, as well as the yen’s value and its effect on the Japanese economy.
Domestic Politics and Fiscal Budget Influence
On the domestic front, Marcel Thieliant, Head of Asia Pacific at Capital Economics, emphasized that the next key factor to watch is the supplementary budget’s approval. During his campaign, Japanese Prime Minister Shigeru Ishiba committed to creating a supplementary budget for fiscal year 2024 to fund economic aid, potentially exceeding the previous year’s allocation of 13 trillion yen (around $84.6 billion).
The budget size could grow if the administration considers the Democratic Party of the People's proposals to alleviate rising energy costs. These factors could increase the scale of the fiscal package further.
A prime ministerial election is set for November 11, and if Ishiba retains power, he is expected to form his second cabinet before traveling to Brazil for the G20 summit. Upon his return, Ishiba plans to convene an extraordinary Diet session to pass the supplementary budget.
Thieliant noted, “The Diet is expected to convene on November 11, and the session typically runs until mid-December, so there should be enough time to pass the supplementary budget. If, however, political issues delay the budget, a December rate hike might be ruled out, as the uncertainty around fiscal policy would pose additional risks.”
In conclusion, the Bank of Japan has maintained a relatively hawkish stance in its economic outlook, signaling a commitment to normalizing monetary policy. However, the exact timing of a rate hike will depend on various factors, including domestic political developments, global economic conditions, and the yen’s performance in the forex market.
