(Bloomberg) -- Bank of Japan Governor Kazuo Ueda faces the delicate task this week of making sure investors are firmly aware of interest rate hikes to come without ruffling markets even as he stands pat on policy.
All 53 economists surveyed by Bloomberg said Ueda’s board will leave the benchmark rate at 0.25% when its two-day meeting concludes Friday. Almost 70% of them forecast a rate hike by December, making the BOJ’s messaging crucial, particularly after it drew criticism for a lack of communication leading up to the July 31 rate increase and the market mayhem that followed.
The BOJ gathering will come just hours after the Federal Reserve is expected to make a momentous pivot toward an easing cycle after an aggressive tightening campaign that began in 2022. A turnaround by the Fed would further highlight the BOJ’s contrasting trajectory among its peers as the lone bank moving higher to normalize policy, a process it began with its first hike in 17 years in March.
With markets split on how big the US rate cut will be, there is scope for renewed market volatility, providing the BOJ with another reason to hold for now. An ongoing leadership election in Japan’s ruling party is another factor supporting the view among economists that the BOJ will maintain its settings this week.
That leaves Ueda with the challenge of reminding market players that the BOJ remains on a path toward higher rates and that the holding pattern is just temporary as it monitors market moves after the Fed and gauges the impact of its July hike.
With economists touting December as the most likely month for the bank’s next move, Ueda will need to use this week’s meeting to prepare markets if he still has an earlier move on his radar.
“This is an important opportunity to know where the BOJ stands on policy,” said Taro Kimura, an economist at Bloomberg Economics. “If they see a chance of an October rate hike, Ueda is likely to send some kind of signal for that.”
After the BOJ raised the rate for a second time this year in July, Ueda sent clear hawkish signals about the outlook, spooking global investors. That was followed by weak US data that rekindled concerns about a slowdown there. The combination spooked markets, buoyed the yen and chased yen-carry speculators from their positions. Those initial moves fueled a rout in risk assets and the biggest daily drop in Japanese stocks on record.
Volatility in Japan’s equities markets has remained high since then, with stocks extending a period of wild swings last week.
The global market meltdown prompted lawmakers to call on Ueda to explain the thinking behind monetary policy at a highly unusual session conducted when parliament was closed. The proceedings ran for five hours.
For now the central bank would probably prefer to avoid drawing renewed attention from politicians as the nation prepares for a political transition. The Liberal Democratic Party’s leadership race kicked off last week, with the winner almost certain to become the nation’s next prime minister.
While BOJ officials are of the view that the early August market ructions were mainly caused by factors related to the US economy, they also must humbly acknowledge that the turmoil occurred just a few days after their policy decision, according to people familiar with the matter.
In a rare move, even a BOJ board member signaled frustration over the bank’s handling of its messaging efforts in July, which may have confused some market participants regarding the central bank’s policy intentions.
“I feel that there was room for better communications including its timing,” Naoki Tamura, one of nine board members told reporters Thursday. “It’s important to work on improving communications.”
BOJ officials acknowledge there was a communications vacuum ahead of the July meeting, though that was purely down to bad luck, according to the people. Ueda didn’t have an opportunity to discuss monetary policy in public for more than a month. Parliament was in recess after an ordinary session ended on June 23, and the governor skipped the Group of 20 meeting in Brazil in July.
“The BOJ should have someone speak in public in periods in between meetings,” economists Mari Iwashita and Kento Minami at Daiwa Securities wrote in a note Friday. “If that’s impossible, it should schedule a media interview for seamless communications.”
In the past month, the central bank has communicated much more. Five board members including Ueda have signaled that the bank will hike rates when its price target is realized in line with its current projections.
Tamura, the most hawkish member of the board, cited the need to raise the policy rate to 1% in the latter half of the BOJ’s current projection period, which spans from October next year through March of 2027.
Officials inside the bank aren’t ruling out another rate rate move later this year or in early 2025, depending on the state of the economy and financial markets, according to the people.
Japan’s wage data showed the biggest gain in 31 years and revised GDP reaffirmed Japan’s economy was on a recovery track last quarter. Economists see both developments as laying the groundwork for another rate increase.
“It’s undeniable that the BOJ’s stance became more cautious after the rapid market volatility upset its top officials,” said Izuru Kato, chief economist at Totan Research. “Still, their policy reaction function must be unchanged, so they will probably raise rates in December once they confirm no major disturbances to the global economy arising from the Fed’s rate cut and US presidential election.”
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