Japan’s political calendar and yen will delay a rate hike to December

The Bank of Japan maintained its policy rate at 0.25% during Friday’s meeting. Although we still expect an additional rate hike this year, we now expect that it will take place in December rather than October, given the updated political calendar and the recent yen strength.

What you will learn:

• Economic developments seem to support an earlier rate hike. Though the CPI inflation is trending down, it is mostly due to a fading supply side pressures and will not likely alter the BoJ’s projection that its inflation target will be achieved in the coming years. Consumption is staring to improve as inflation eases and wages increase after a strong Spring Negotiation.
• Financial markets are still jittery but are gradually calming down following a period of heightened volatility in early August. As financial markets calm down, the bond market is again pricing in an additional rate hike by the BoJ within this year, backed by recent hawkish comments from BoJ officials.
• We now think that the BoJ’s next rate hike will be in December, rather than October, to avoid worsening its relationship with the new administration. Although the overall impact of an additional hike will be limited, its impact on vulnerable firms and households will not be politically welcomed. At the press conference, Governor Kazuo Ueda stated that recent yen gains have reduced upside risks to the price outlook and provided more time to consider next move.