Bank Of Japan Seen Keeping Rates On Hold As Market Awaits Hints Of Next Hike

The Bank of Japan is widely expected to hold its benchmark interest rate steady at the conclusion of its board meeting on Friday, leaving traders on watch for any clues regarding the prospects of a hike later this year.

All 53 surveyed economists expect borrowing costs to be left at 0.25% at the end of the two-day meeting. They will closely watch how the bank communicates its likely policy trajectory after the BOJ's messaging attracted criticism in the aftermath of its rate hike and hawkish policy signals in July. They were seen helping fuel a massive sell-off in global financial markets.

Governor Kazuo Ueda's board has made it clear in a flurry of recent speeches that it aims to raise rates further if inflation moves in line with the bank's projections. At the same time, six of nine board members who spoke since the July meeting, including Ueda, have stressed the need to monitor financial markets still deemed unstable, in a sign they don't plan to take action this week.

Beyond September the policy outlook becomes somewhat hazy, as views among BOJ watchers are divided. With the Federal Reserve having finally joined most of its peers in pivoting to rate cuts on Wednesday, momentum for a global easing cycle is gaining traction.

Against that backdrop, market pricing indicates it may be difficult for the BOJ to move higher again this year. And yet, about 70% of economists surveyed by Bloomberg expect another increase by December.

The market meltdown in early August wiped out $1.1 trillion from Japan's stock market over three trading days. While stock prices have since pared losses, volatility in the market has stayed at the highest among major global indices.

With that in mind, Ueda will do his best to carefully calibrate his communications when he speaks at a press briefing usually at 3:30 p.m. after the release of the policy statement around noon. 

What Bloomberg Economics Says...

“Our base case is that Governor Kazuo Ueda will choose to hold at this week's meeting and leave the door for an October hike — though there's a chance he will signal the BOJ could wait longer before delivering its next rate increase.” — Taro Kimura, economist.

Here is what to watch for:

• Whether Ueda drops any hints regarding the likelihood of a rate move at meetings in October or December will be a key point to monitor. BOJ officials haven't ruled out another hike this year or in early 2025, people familiar with the matter told Bloomberg earlier.

• The BOJ chief is likely to state that the economy is performing in line with the bank's expectations of late, after economic data showed solid wage gains and stronger inflation.

• The BOJ is likely to indicate upward inflation risks have receded after the yen's dramatic reversal in recent weeks. After slumping to a 38-year low of 161.95 per dollar in early July, Japan's currency has outperformed peers over the last month. That takes some pressure off the bank.

• With market volatility remaining high, the bank is likely to stress the importance of monitoring financial markets and their impact on the economy and inflation. BOJ watchers will look for signs of how long authorities expect the jittery price action to continue, with possible risk events including the Fed's efforts to secure a soft landing and the US presidential election in November.

• Ueda is likely to be asked about the potential impact from the ruling Liberal Democratic Party's Sept. 27 leadership election, a contest that will almost certainly determine the nation's next premier given the party's dominance in parliament. The governor is likely to reply with a standard pledge to continue to conduct policy that's appropriate for price stability.