Will Japan Raise Interest Rates Again? Market Expects "December Outlook"

Impact of July Hike on LDP Election, US Rate Cut
"Rate Hike Not Considered at September Meeting"

As the Bank of Japan (BOJ) approaches its Monetary Policy Meeting scheduled for the 19th to 20th, it is highly anticipated that the central bank will keep interest rates unchanged. This expectation comes after the BOJ raised its benchmark interest rate at the previous July meeting, triggering a large-scale unwinding of yen carry trades that shook global stock markets. Additionally, with the U.S. Federal Reserve (Fed) preparing for a rate cut in September and the upcoming Liberal Democratic Party (LDP) presidential election, market participants are predicting the next rate hike to occur in December this year.

According to the Nihon Keizai Shimbun (Nikkei) on the 14th, multiple Japanese government officials stated that "a rate hike at the September meeting is not under consideration."

[Image source=AFP Yonhap News]

Nikkei explained that raising rates in September could influence the LDP presidential election, so the BOJ is unlikely to make such a decision at this time, and the government would not tolerate it either. The LDP presidential election voting and counting will take place on the 27th.

In QUICK's August monthly bond survey, only about 1% of bond market participants expected a rate hike in September. Meanwhile, 48% of respondents pointed to December this year as the timing for a rate increase, and 32% chose January next year.

On the 13th, Bloomberg reported that in a survey of 53 economists, approximately 53% forecasted that the BOJ would raise rates in December. None of the respondents expected a rate hike in September. Under a risk scenario, 53% of respondents anticipated the earliest rate increase to be in October.

Masamichi Adachi, Chief Economist at UBS Securities Japan, said, "The possibility of a rate hike at this meeting is extremely low," adding, "It is too early to discern the impact of the July rate hike and the market crash."

Expectations that the Fed will begin cutting rates in September also make it difficult for the BOJ to raise rates easily. Fifty-six percent of respondents indicated that U.S. rate cuts could potentially influence the BOJ's interest rate path.

However, Bloomberg noted that although the global stock markets plunged due to the unwinding of yen carry trades following the July 31 rate hike, most economists do not believe this shock was enough to divert the BOJ from its normalization path.

BOJ officials have repeatedly stated their intention to continue raising the benchmark interest rate.

On the 12th, Naoki Tamura, a BOJ Policy Board member, said that if economic and price trends align with projections, the policy rate should be raised "to at least around 1%." On the 11th, Junko Nakagawa, another BOJ Policy Board member, stated that assuming stable economic and price increases, the degree of monetary easing would be adjusted accordingly.