After a chaotic election, the Bank of Japan decided to keep its benchmark policy rate at 0.25%, as expected. But analysts said the central bank’s focus on normalizing monetary policy, meaning raising interest rates, remained unchanged.
The Bank of Japan’s board of directors maintained its three-year inflation forecast with slight adjustments, showing that economic progress is in line with expectations.
At a news conference after Thursday’s decision, Bank of Japan Governor Kazuo Ueda noted that risks surrounding the U.S. economy were easing, suggesting conditions could soon be conducive to another rate hike. After Ueda made these remarks, the yen rose to 151.9 against the US dollar.
Stefan Angrick, associate director and senior economist at Moody’s Analytics, described the tone of the announcement. Bank of Japan Outlook Report For “moderate” hawks. “If you look at the central bank’s forecasts for growth and inflation, those forecasts still suggest that a rate hike is coming,” he said.
“The only question is really timing, with the yen still weak and my money on a rate hike before the end of the year, what happens next year will depend on spring or spring wage talks,” Angrik added. Annual salary negotiations between unions and employees.
The outlook report did mention risks to upward bias in prices in “fiscal year 2025,” which economists said could be a reference to concerns about a weakening yen.
The yen fell about 1% on Monday to a three-month low after the ruling Liberal Democratic Party suffered its worst election defeat in 15 years. On Friday morning, the yen was trading at 152.27 to the dollar.
A weaker yen generally benefits large Japanese companies with international operations because they increase the value of profits brought back from overseas. The downside, however, is that a weaker yen will increase the cost of imported energy and food, putting pressure on households.
The Bank of Japan’s outlook report also noted the need to pay close attention to global economic and market trends, emphasizing attention to risks that could affect the delicate domestic recovery when considering the timing of policy tightening.
Akira Otani, senior economic adviser for Japan at Goldman Sachs, predicts that the Bank of Japan will raise interest rates in January. Ohtani added that these risks to the outlook highlight that the timing of the Bank of Japan’s next rate hike may depend heavily on overseas developments, currency rates and their impact on Japan’s economy.
On the domestic political front, Marcel Thieliant, head of Asia Pacific at Capital Economics, told CNBC that the next key point to watch is the potential passage of the supplementary budget.
Japanese Prime Minister Shigeru Ishiba said during the campaign that his government intended to prepare a supplementary budget for fiscal year 2024 to fund economic aid programs. This would exceed the 13 trillion yen ($84.6 billion) allocated in last year’s supplementary budget, he added.
However, the size of the budget could increase further if the government decides to adopt the People’s Democratic Party’s recommendations to ease the burden of rising energy costs.
An election to determine the prime minister is scheduled for November 11.
When Ishiba returns, he is reportedly expected to convene a special congressional session during which he hopes to pass a supplementary budget plan local news.
“Congress should convene on November 11, which usually lasts until mid-December, so they have enough time to pass a supplementary budget,” Tilliente said. The Bank of Japan may then raise interest rates that same month.
“If they don’t. If for some reason, it’s delayed because of political issues, then I would probably rule out a December rate hike because that would create a lot of uncertainty about the fiscal situation.”
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