BOJ Rate Decision: When’s the Next Hike?

Markets are resoundingly convinced that the BOJ Rate Decision won’t result in a hike at the upcoming meeting that ends on Thursday. But, it also seems the BOJ is having trouble breaking its habit of shocking the market. And economists have come to the conclusion that Japanese regulators will raise interest rates this year. So, at the very least, this could be an opportunity for Governor Ueda to hint that the next meeting will come with more tightening.

The BOJ is meeting in the context of political upheavals in the country that have monetary policy implications. The elections over the weekend have bruised PM Shingeru Ishiba’s mandate, as his LDP party lost its ruling majority for the first time since 2009. We should remember that Ishiba was a surprise winner and hawk of the LDP leadership competition, with his main rival Sanae Takaichi seen as supporting much more dovish monetary and fiscal policy.

The Currency Impact

The Japanese parliament will hold a session in the next 30 days to elect a prime minister, with Ishiba apparently seeking to rule on a minority basis. That would mean his Cabinet wouldn’t be able to pass laws on a unilateral basis, likely curbing the more hawkish stance he had voiced during his leadership campaign.

That explains some of the recent moves in the yen. Ishiba’s surprise win led markets to suspect more hawkish fiscal policy would leave the BOJ in a position to raise rates faster. But the results of the election are seen as a validation of the more dovish policies espoused by Ishiba’s rivals, leaving the BOJ back where it was before the leadership contest. This leaves the market once again challenging Japanese authorities, with a hope that the carry trade could resume. Just last week, Finance Minister Katunobu Kato picked up his predecessor’s rhetoric about watching currency moves, trying verbal intervention to halt a slide in the yen

Pointing the Finger

The BOJ is back in a pickle, and now is focusing on “external” problems. In a recent appearance, Governor Kazuo Ueda warned that there was a lot of “uncertainty” (in fact, it was one of his most used descriptive words during his speech), but did say that raising rates too slowly would be a problem. As for moves in the yen, he stuck to the view shared with the Ministry of Finance that it was up to currency speculators.

However, the last time the BOJ moved its policy higher, the stock market took a dive and the currency reversed substantially. Policymakers blamed that on the reaction to US NFP that came out immediately afterwards, which shifted the outlook for the Fed.

What to expect

The BOJ is now meeting in a particularly fraught external environment, with NFP a day later, and less than a week ahead of the US presidential election. This has led many investors to suspect that the BOJ will try to avoid making waves, which might include providing any concrete hits about a rate hike happening at the next meeting.

In terms of the reaction among traders, markets are pricing in a 50-50 chance of the next hike being either in December or January. With such eagerness for some kind of clue as to which it will be, there is a chance that even if Ueda tries to take a middle-of-the-road approach, market participants will jump on something that can be interpreted as indicating a preference. That could lead to some erratic trading in the hours after the decision, which could fade as the overall trend reasserts itself.

Trading the news requires access to extensive market research – and that’s what we do best.

OPEN LIVE ACCOUNT