(Oct 30): The Bank of Japan (BOJ) is widely expected to stand pat on Thursday in the face of elevated uncertainty, as financial markets brace for the US presidential election after Japan’s polls resulted in a lack of clarity over its next government.
Governor Kazuo Ueda and his fellow board members are set to keep the central bank’s benchmark interest rate unchanged at 0.25% at the end of the two-day meeting, according to all but one of 53 economists surveyed by Bloomberg.
The BOJ gathering comes after Sunday’s election saw the ruling Liberal Democratic Party (LDP) suffer its worst result in 15 years. The political instability as a result of the ruling coalition losing its majority likely gives more reason for Ueda to wait and see. He had already indicated he wants to monitor the result of the US election and its implications for the economy and financial markets.
“The BOJ’s playbook is ‘don’t move when uncertainties are high,’” said Atsushi Takeda, the chief economist of Itochu Research Institute. “It’s unlikely they will give a clear hint over a rate hike in December or January at this point. They don’t want to commit to anything now.”
A key focus on Thursday is whether the BOJ may give any signals about when they may hike next. Some 87% of BOJ watchers anticipate a move by the end of January, with 53% predicting it will come in December.
Traders will be watching to see if Ueda goes beyond reiterating the central bank’s existing stance that it will raise rates if its inflation outlook is realized. Another key point is whether Ueda will continue to say that he has time to consider his next policy move, a signal that a policy change isn’t imminent.
Following the LDP’s worse-than-expected showing at the polls, investors see a higher bar for the central bank to increase borrowing costs amid the political instability.
The yen dropped as much as 1% to 153.88 on Monday, its lowest since July. This took it nearer levels where Japan last intervened to prop up the currency, with authorities already warning about the yen’s moves.
A weaker yen has tended to fan market speculation that the BOJ will raise interest rates earlier to curb imported inflation. Overnight-indexed swaps fully price in a rate increase of 25 basis points by June next year. Immediately after the previous meeting last month when the yen was about 7% stronger, swaps suggested no policy move over the next 10 months.
“The key watch will be if governor Ueda signals risks from political instability,” said Charu Chanana, the chief investment strategist of Saxo Markets in Singapore. “Risks of BOJ’s rate hike delays could only add to the pressures on the yen, which is already reeling under pressure from higher US yields and US election risks.”
In addition to its policy statement, the BOJ will release its latest quarterly economic projections for the three fiscal years ending in March 2027. Authorities see little need for any major change as inflation is coming along with their forecast, people familiar with the matter told Bloomberg earlier this month.
Another focus point in the outlook report is whether the bank will keep saying that risks for inflation are on the upside for this fiscal year and next. Ueda cited it as one of the driving factors for a rate hike in July. While the yen’s appreciation from a 38-year low in the same month reduces inflationary pressures, a recent bout of decline complicates the BOJ’s call.
Japan’s key inflation gauge has stayed at or above the BOJ’s 2% target for 30 months and wage gains have accelerated to the highest level on record. Even the International Monetary Fund said that it has greater confidence over the sustainability of Japan’s price growth.
“Japan’s inflation and wages are coming along as the BOJ has expected,” Itochu’s Takeda said. “The chance for a December rate hike has dropped because of political uncertainty, but it’s not off the table yet.”
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