Despite Election Results... BOJ Expected to Maintain Rate Hike Stance

Bloomberg Reports
Focus on Next Week's Monetary Policy Meeting
"Unlikely to Change Economic Outlook Immediately"

Kazuo Ueda, Governor of the Bank of Japan. Photo by AFP

Despite the ruling party's defeat in the House of Councillors election, the Bank of Japan (BOJ), Japan's central bank, is expected to maintain its current stance on raising the benchmark interest rate.

According to Bloomberg News on July 22, BOJ officials stated that the policy board, led by Governor Kazuo Ueda, is highly likely to keep the benchmark interest rate unchanged at 0.5% at its meeting next week. The BOJ policy board is scheduled to hold its monetary policy meeting on July 30-31.

Since trade negotiations between the United States and Japan are ongoing, BOJ officials explained that the bank would first assess the impact of any related agreements on inflation trends and the economy before considering additional rate hikes.

Previously, the ruling party led by Prime Minister and Liberal Democratic Party (LDP) President Shigeru Ishiba lost its majority in the House of Councillors election on July 20. In the final tally, the LDP secured only 39 seats, while its coalition partner, Komeito, won 8 seats. As a result, both the House of Representatives (lower house) and the House of Councillors (upper house) are now under opposition-majority control.

This has weakened the ruling party's political position, making it more sensitive to demands from the opposition, according to Bloomberg News. Currently, Prime Minister Ishiba is considering additional fiscal spending measures to restore his political base, while opposition parties are calling for more costly household support policies, such as a reduction in the consumption tax.

The BOJ is reportedly of the view that if the government significantly expands fiscal spending in the future, it will be necessary to pay close attention to rising inflationary pressures. In particular, the sharp increase in food prices, including rice, has pushed up the inflation rate, raising the risk of upward pressure on prices.

Although U.S. President Donald Trump has warned that a 25% reciprocal tariff will be imposed on Japan if negotiations fail starting August 1, this is not expected to have a significant immediate impact on the economic outlook. The BOJ had already forecast a short-term economic slowdown in its May outlook, so this measure is not expected to substantially change its economic forecast.