Japan's Central Bank Likely to Hold Steady in October, Focus on Inflation Outlook Adjustment
The Bank of Japan's interest rate decision meeting in October is approaching, and the market is almost unanimously expecting "no change," with the focus on how the 2024 fiscal year inflation forecast will be adjusted, and Governor Haruhiko Kuroda's statements on interest rate hikes and their influencing factors.
On Thursday, according to a Bloomberg report, most economists surveyed by Bloomberg indicated that the Bank of Japan is expected to keep the benchmark interest rate unchanged at the meeting next week (October 31), with the next rate hike likely in December or January.
Specifically, the survey showed that almost all 53 Bank of Japan watchers predicted that the Bank of Japan would keep interest rates unchanged. Approximately 53% believe that the Bank of Japan will raise rates in December, and the number of people expecting a rate hike in January has jumped from 19% to 32%.
Since "no change" is almost certain, the focus of this meeting is whether the Bank of Japan will adjust its July inflation risk forecast, specifically whether the phrase "price upside risks in the 2024 fiscal year (March 2025)" will be removed. If this phrase is removed, expectations for a December rate hike may be somewhat diminished.
Advertisement
Another highlight is Governor Haruhiko Kuroda's remarks at the press conference. It is expected that Kuroda will not make any definitive statements, while reiterating the stance that the central bank will raise rates if its inflation outlook is realized. Additionally, he may emphasize that there is still uncertainty in overseas economic trends, particularly in the U.S. economic trends.
2024 Fiscal Year Price Upside Risk: To Remove or Not to Remove, That is the Question
Regarding the October outlook report, whether the Bank of Japan will remove the price upside risk for the 2024 fiscal year (March 2025) is a major focus.
The Bloomberg survey shows that about 45% of economists believe the central bank will maintain this risk assessment, while 41% of economists expect the central bank to make changes, and another 14% of economists say it is difficult to determine.According to the minutes of the July monetary policy meeting, the Bank of Japan decided to raise interest rates at the meeting, and several committee members expressed the following view:
Given that the year-on-year increase in the Consumer Price Index (CPI) has exceeded 2% for more than two years, the upward risk of prices will become a more important factor in the central bank's policy decisions.
The outlook report in April 2024 pointed out that the price risks for the fiscal year 2024 tend to be upward, but overall are balanced. However, the warning in the July outlook report is stronger, stating that:
The price risks for fiscal years 2024 and 2025 tend to be upward.
Morgan Stanley's latest report on October 23 pointed out that if the Bank of Japan removes the upward price risk for fiscal year 2024 in its October outlook report, it is expected that the market's expectation for a rate hike in December may weaken.
In addition, in his speech on September 24, Kazuo Ueda mentioned that when raising interest rates in July, the re-increase in import prices due to the depreciation of the yen was considered, which constitutes an upward risk for prices. However, he also pointed out that since August, the one-sided depreciation of the yen has eased, and the rise in import prices has slowed down. In September, import prices fell by 2.6% year-on-year, marking the first decline in eight months. However, in the past few weeks, the yen has weakened again, and the US dollar has broken through the 150 mark against the yen. These fluctuations and their impact on prices may complicate the Bank of Japan's views.
Morgan Stanley believes that the Bank of Japan may maintain its view on the upward price risks for fiscal years 2024 and 2025. Takeshi Kato, an executive director of the Bank of Japan, stated on October 22 that in an environment of continuous depreciation of the yen, prices may be more affected.
What to watch at Kazuo Ueda's press conference?Another major highlight is the speech by Bank of Japan (BOJ) Governor Haruhiko Kuroda at the press conference.
Morgan Stanley believes that Haruhiko Kuroda may express the following views:
1. The trend of overseas economies, especially the US economy, still has uncertainties, and financial market trends remain unstable, while pointing out that the trends in personal consumption, wages, and prices are generally in line with expectations.
2. Reiterate the existing view that if the underlying inflation rate rises as outlined by the BOJ's outlook, it would be appropriate to correspondingly raise policy interest rates and adjust the degree of monetary easing.
3. Regarding the recent depreciation of the yen, we expect him to emphasize that exchange rate movements may be more likely to affect prices than in the past, as corporate behavior shifts more towards increasing wages and prices.
4. Pay attention to any comments on the October Tokyo CPI data, as well as the latest assessments and outlooks on CPI service prices, such as the 2025 wage increase target of Japan's largest labor union federation, the latest trend in wage growth, recent corporate and household inflation expectations, opinions on price reduction behavior reported by some companies, etc., and whether Haruhiko Kuroda will mention the data that the BOJ will monitor before the December monetary policy meeting.
However, some analyses point out that the possibility of Haruhiko Kuroda issuing a clear signal of a rate hike in December is very low. Naoya Hasegawa, Chief Bond Strategist at Okasan Securities, said:
The possibility of the BOJ issuing a strong signal of a rate hike in December is very low. The BOJ may emphasize closely monitoring the US economy and Japanese inflation and wages, and maintain the stance on raising interest rates if expectations are met.
Leave a Comment