(Bloomberg) -- The Bank of Japan kept its benchmark interest rate unchanged while sticking to its view that it’s on track to achieve its inflation target, an outlook that points to the possibility of another rate hike in the coming months.
That view was reinforced by Governor Kazuo Ueda at a press briefing following the decision, when he said the current political situation in Japan wouldn’t stop him from lifting rates if prices and the economy stay in line with the central bank’s forecasts.
“Our basic stance is that if our economic and price outlooks are realized, we’ll respond by raising rates,” Ueda said. It was also no longer necessary to say the bank had “time to mull” before making any decision to adjust policy as risks from the US economy had largely receded, he added.
The yen climbed as some investors interpreted his comments as pointing toward higher rates in the pipeline.
“Ueda is clearly laying the ground for a rate hike. Given his comments today, the likelihood of a December hike has risen,” said Nobuyasu Atago, chief economist at Rakuten Securities Inc. and a former BOJ official.
Earlier in the day Ueda and his fellow board members maintained the unsecured overnight call rate at around 0.25% as widely expected by economists. The board had plenty of reasons to hold for now given a range of uncertainties still in play for the economy including the outcome of the US presidential election and the recent memory of August’s market meltdown.
In addition to the battle between Vice President Kamala Harris and former President Donald Trump for leadership of the US, political uncertainty at home has intensified following the ruling Liberal Democratic Party’s worst election result in 15 years over the weekend.
That outcome potentially saps the government’s ability to balance economic measures with a degree of fiscal restraint. Depending on what kind of deal Prime Minister Shigeru Ishiba needs to strike to secure support for his minority government, pressure on the central bank to go slower on hikes could increase.
“I personally don’t think that instability will keep the BOJ from raising the rate,” said Toru Suehiro, chief economist at Daiwa Securities Co.
What Bloomberg Economics Says...
“Governor Kazuo Ueda dialed back his cautious stance...He signaled upcoming meetings will be live. We think the BOJ will take a few more months to determine the coast is clear — and hike rates again in January.”
— Taro Kimura, economist
To read the full report, click here
In its quarterly report the central bank said it needed to pay attention to the course of overseas economies and the US economy in particular.
“We’ve been looking at the downside risks to the US and overseas economies, but that fog is clearing somewhat,” Ueda said. “Needless to say, new risks could emerge depending on the policies coming from the new US president.”
Ueda made clear that the BOJ would respond to those risks if needed, but wouldn’t err on the side of waiting for anything just in case.
The yen gained as much as 1% against the dollar to reach 151.92 after the Ueda comments. Japanese shares dropped slightly amid concern the rising yen will hurt exporters, with the Topix index finishing down 0.3%. The benchmark 10-year bond yield dropped 1.5 basis points to 0.935%.
Investors, businesses and economists are now wondering if the next move will come in December or January.
Economists surveyed by Bloomberg before the meeting favor December over January, while overnight swaps show market players still seeing January as more likely. The market is now giving a 69% chance of a move by January, compared with 63% on Wednesday.
The bank continued to say it expects the underlying price trend to be consistent with its 2% stability target in the latter half of its three-year projection period ending in March 2027.
The bank also stuck to its view that there is upside risk for its price view for fiscal 2025. That’s an indication that despite all the current uncertainties, the central bank sees the longer term trend on track with a possibility it might strengthen. The BOJ also cited “clearly” increasing nominal wages in a sign of greater confidence for a wage-inflation virtuous cycle it’s seeking for sustainable price growth.
Many BOJ watchers see the currency among the factors for the timing of the BOJ’s next policy move, as a further drop could boost inflationary pressures when households are already struggling with the rising cost of living.
If the yen hits 155 against the dollar, Ishiba is likely to signal acceptance for a rate hike, according to the median estimate of economists in a Bloomberg survey. The strengthening of the yen for now suggests the BOJ largely got its messaging about right.
--With assistance from Yoshiaki Nohara, Erica Yokoyama, Matthew Burgess and Winnie Hsu.
(Adds economist comments following Ueda presser)
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