By Leika Kihara

TOKYO (Reuters)

The Bank of Japan holds a two-day policy meeting concluding on Oct. 31, just after a general election where new Prime Minister Shigeru Ishiba faces a crucial test for his agenda to increase wages and revitalize the country's weak regional economies.

What to Expect from the BOJ's Rate Review

• Is the BOJ Going to Raise Interest Rates?
  The BOJ ended negative interest rates in March and raised its short-term policy target to 0.25% in July. It has signaled readiness to hike again, contingent upon sufficient confidence that Japan will durably meet its 2% inflation target. However, with stable inflation around 2% and few spikes, there's no immediate rush for a rate hike.
  The central bank is widely expected to maintain steady rates at the October meeting, as Governor Kazuo Ueda emphasizes the importance of analyzing risks such as uncertainties in the U.S. economy and volatility in markets. Notably, central banks typically avoid policy changes around significant political events, which adds to the likelihood of stability during this period of domestic and upcoming U.S. election.

Market Watch

The BOJ stated it would increase rates if the economy and prices align with its forecast. This means the quarterly report, including updated growth and price forecasts, could provide insights on the timing of the next rate hike. Sources indicate that major changes to inflation forecasts hovering around 2% are unlikely. While such projections could justify further hikes, attention to risks like slow global growth may signal a careful approach, potentially dampening year-end hike chances. Conversely, optimism regarding sustained wage increases could point towards an imminent rate hike.

Other Considerations

Governor Ueda's post-meeting briefing on Oct. 31 at 3:30 p.m. Tokyo time (0630GMT) is anticipated to reveal further clues on future rate hikes. In a prior briefing, he indicated the BOJ can afford time to examine risks. His commentary on the yen, which has recently declined, will be critical, as a weaker yen raises inflation through increased import costs.

Analyst Insights on Rate Hike Timing

After the October meeting, the BOJ's next policy meeting is set for Dec. 18-19, followed by another on Jan. 23-24. A slight majority of economists polled by Reuters expect the BOJ to refrain from a hike this year, anticipating a rate increase by March next year.

Potential Challenges to Rate Hikes

The BOJ expresses readiness to elevate rates to neutral levels – around 1% – by late next year or early 2026. However, challenges exist. The BOJ is banking on generous wage hikes this year to bolster consumption, enabling retailers to continue price increases. Yet, reduced global demand could inhibit manufacturers from offering significant pay rises next year. Additionally, political uncertainties could impact the BOJ’s rate-hike ambitions, as Ishiba may resist further increases should his ruling party perform poorly in the upcoming election.