Bank of Japan to Keep Interest Rates Unchanged

Investing.com—The Bank of Japan is expected to maintain interest rates at the upcoming meeting due to heightened political uncertainty in the country that may affect the central bank’s monetary policy plans.

According to a Reuters poll, the BOJ is forecasted to keep the benchmark short-term rate at 0.25%. The central bank raised this rate twice earlier in the year, attributing it to higher wages and increased private spending.

However, analysts express skepticism about the BOJ's ability to raise rates further this year amid a fractured political environment.

Following elections over the weekend, a coalition led by Japan’s ruling Liberal Democratic Party (LDP) lost its parliamentary majority. The LDP is anticipated to seek alliances with smaller regional parties, potentially weakening its political influence.

This scenario could encourage increased fiscal spending, imposing more political resistance on the BOJ regarding tightening monetary policy.

The leader of the opposition Democratic Party for the People emphasized that the BOJ should not rush into raising interest rates due to stagnant wage growth in recent months.

Earlier in the year, improved wages boosted private consumption and household spending, but this growth trend is perceived to be slowing through September and likely October.

Furthermore, Japan’s consumer inflation has struggled to meet the BOJ’s 2% annual target in recent months, complicating the central bank’s tightening plans.

Governor Kazuo Ueda mentioned last week that the BOJ is taking its time to sustainably achieve inflation goals but also cautioned against an excessively slow approach to raising rates.

The BOJ is expected to discuss this trend in its upcoming rate decision. However, analysts remain doubtful about whether the bank will indicate more rate hikes amidst the political uncertainties.

> “In the long term, the BOJ is likely committed to its rate normalization plans. However, in the short term, it will proceed cautiously given the elevated political uncertainty. We do not expect the BOJ to hike rates,” stated analysts at ANZ, while noting a possible 25 basis point hike in December.

How Will the Nikkei React?

Japanese stocks have surged this week following the LDP’s election loss, with the Nikkei 225 and TOPIX witnessing significant rises. This increase is attributed to expectations of heightened fiscal spending and delays to the BOJ’s tightening plans, bolstering a more favorable outlook for local markets.

Dovish signals from the BOJ may further boost Japanese markets, as Japanese interest rates, despite earlier hikes this year, still lag behind those in other developed markets.

Citi analysts recently noted that the prospect of more expansionary policies in Japan, particularly on the fiscal side, could lead to greater strength in domestic stocks, potentially offsetting political uncertainty headwinds.

How Will USDJPY React?

Following the LDP election loss, the Japanese yen weakened sharply, with the USDJPY pair, which measures how many yen are needed to purchase one dollar, reaching a three-month high this week.

The yen has been experiencing declines throughout October amidst rising expectations that significant interest rate differentials between the U.S. and Japan will continue in the upcoming months. Any dovish signals from the BOJ are likely to amplify this trend.

UBS analysts noted that political uncertainties clouded the short-term outlook for the yen, though they projected some medium-term strength as the Japanese economy trends upward and U.S. interest rates potentially decline.