BOJ remains on course for future hikes in October

Latest bank decision: At its meeting on 31 October, the Bank of Japan (BOJ) decided to maintain the policy rate at around 0.25%, meeting market expectations. However, the BOJ reaffirmed its plan to hike rates ahead.

Monetary policy drivers: The hold—the second consecutive after July’s hike—was likely driven largely by the BOJ’s inflation forecasts, which continue to suggest that price pressures will remain around the 2.0% target for the foreseeable future.

Policy outlook: The BOJ reaffirmed that it would raise its policy rate ahead, conditional on its outlook for economic activity and inflation being realized. All of our panelists expect the BOJ to raise rates by the end of 2025, though they are more split when it comes to the exact timing of hikes: A slight majority expect one at the BOJ’s last meeting this year on 18–19 December, with the rest expecting one in Q1 2025. Our Consensus is for a total of 50 basis points of hikes by the end of next year. Risks to the outlook are tilted to the upside, as those for inflation—the main determinant of the BOJ’s monetary policy—are too.

Panelist insight: Goldman Sachs analysts said: “Considering the decision at the October MPM, the October outlook report and the post-meeting press conference, we continue to believe that the next rate hike will be in January next year. However, considering the BOJ’s concern about upward pressure on prices from recent yen depreciation, we note the BOJ may well decide to raise the policy rate in December if the USD/JPY exchange rate moves towards around JPY160/USD.” Nomura’s Kyohei Morita points out that, even after hiking, the BOJ’s monetary policy stance will remain accommodative: “This scenario [of rate hikes by the end of 2025] does not imply a pivot to monetary tightening by the BOJ. Based on our forecasts for CPI inflation, policy rate hikes in keeping with [our] scenario would still leave the real rate of interest at around -0.8% at the end of 2025 […] the BOJ’s monetary policy is on track to remain accommodative even with some rate hikes along the way.”

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