The consensus among economists is that the BOJ will debate when to raise rates, but won’t actually hike at its monetary policy meeting on Thursday. Although inflation remains elevated, analysts believe that the fiscal and political situation will prompt the central bank to wait at least one more month before raising rates.
The yen has been weakening ever since it became apparent that Sanae Takaichi would become the new Prime Minister. She is noted for having expansionist fiscal views, similar to her predecessor Shinzo Abe. The new prime minister is still fleshing out her policy, and hasn’t yet met with the BOJ’s Governor, Kazuo Ueda. There is strong cooperation between Japan’s Ministry of Finance and its central bank, which is seen as key for maintaining consistent currency stability. As such, the BOJ will likely not want to make any major policy changes for the moment.
Trump, Tariffs, and Interest Rates
One of the challenges for the BOJ is the sluggish performance of Japan’s economy, which has been hit by tariffs from the US. The US is Japan’s largest export destination, although in aggregate, China is its largest trade partner. However, economists have noted that there has been little evidence that the tariffs have hurt Japan’s economy. In fact, exports actually rose in September, after the two countries reached a trade deal.
US President Donald Trump is in Tokyo ahead of the APEC meeting in Seoul later this week. Before meeting Japan’s new prime minister, he had positive comments to say about her, likening Takaichi’s policy views to Abe’s. With former Prime Minister Abe being a close friend of Trump’s, some analysts speculate that the new prime minister could reopen negotiations and secure more favorable trade conditions in the future.
Where the BOJ Stands
Renegotiating trade could help support the Japanese economy and alleviate the BOJ”s quandary. Inflation has been above the central bank’s 2.0% target for more than three years at this point. The latest report showed CPI at 2.7%, and has been driven by rising wages, particularly in the services sector. This is in line with what BOJ officials had projected, suggesting that short-term wage pressures would keep inflation elevated and necessitate further policy tightening.
The BOJ raised rates for the first time in decades back in January, and has subsequently talked tough about further hikes. However, it hasn’t actually delivered on higher interest rates. The market is pricing in a 50-50 change of a rate hike by the end of the year, with most bets concentrating on December.
The Market Reaction
How the decision will affect the USDJPY will likely have more to do with external factors. Economists believe that the BOJ will largely reiterate its stance of being ready to raise rates as soon as needed. But the factor that could have a greater impact on the currency pair is the interest rate gap between the USD and JPY.
With the Fed expected to cut rates and keep easing through the rest of the year, the interest rate gap will continue to close. This means the carry trade will likely continue to unwind, effectively doing the BOJ’s job. If the currency strengthens sufficiently, inflation might slow enough that the BOJ can keep delaying the next rate hike.
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