The Bank of Japan kept its benchmark policy rate at 0.25% on Thursday as expected following a chaotic election, but analysts said the central bank's focus on normalizing monetary policy, or raising rates, remained unchanged.
The Bank of Japan's board maintained its three-year inflation forecast with a small adjustment, suggesting the economy is developing as expected.
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 favor another rate hike. The yen rebounded against the dollar after Ueda’s comments.
Stefan Angrick, associate director and senior economist at Moody’s Analytics, described the tone of the Bank of Japan’s outlook report as “moderately” hawkish. “If you look at the central bank’s forecasts for growth and inflation, they still suggest that rate hikes are coming,” he said.
“The only question is really about timing, with the yen still weak, I’m betting the Bank of Japan will raise rates by the end of the year and what happens next year will depend on the spring wage talks,” Angerick added, referring to the annual wage negotiations between Japan’s unions and employees.
The outlook did mention the risk of higher prices in "fiscal 2025," which economists said was likely due to concerns about a weaker yen.
The yen fell about 1% to a three-month low on Monday after the ruling Liberal Democratic Party suffered its worst election defeat in 15 years last weekend.
A weaker yen typically benefits large Japanese companies with international operations because it increases the value of profits brought back from overseas. On the downside, however, a weaker yen raises the cost of imported energy and food, weighing on households.
The BOJ's outlook also noted the need to closely monitor global economic and market trends, and stressed that the BOJ would be mindful of risks that could affect its delicate domestic recovery when considering the timing of tightening policy.
Akira Otani, senior Japan economic adviser at Goldman Sachs, predicted the Bank of Japan would start raising rates in January. Otani added that these risks to the outlook highlight that the timing of the next rate hike by the Bank of Japan may depend heavily on overseas developments, as well as the yen exchange rate and its impact on the Japanese economy.
On the domestic political front, Marcel Thieliant, head of Asia Pacific at Capital Economics, told CNBC the next key point to watch is the potential passage of the supplementary budget.
During the campaign, Prime Minister Shigeru Ishiba said his government intends to prepare a supplementary budget for fiscal 2024 to fund the economic aid package, adding that it would exceed the 13 trillion yen ($84.6 billion) allocated in last year's supplementary budget.
However, the size of the budget could increase further if the government decides to adopt the National Democratic Party's proposals to reduce the energy burden.
Japan will elect a prime minister on Nov. 11. If Ishiba remains in power, he will form his second cabinet and then fly to Brazil for a meeting of the Group of 20 major economies.
According to local media reports, Ishiba Shigeru is expected to convene an extraordinary parliament after returning to Japan, hoping to pass a supplementary budget plan.
"Diet is due to meet on Nov. 11 and usually lasts until mid-December, so they should have enough time to pass the supplementary budget," he said. The BOJ could then raise rates in the same month.
“If they don’t. If it’s delayed for some reason, like political issues, then I would probably rule out a December rate hike because that would create a lot of uncertainty about the fiscal situation,” he added.
Article forwarded from: Jinshi Data