BOJ preview October: hawkish hold expected as inflation remains sticky

 The Bank of Japan is widely expected to leave interest rates unchanged at the conclusion of a two-day meeting on October 30, although the central bank is expected to maintain a hawkish bias amid increasingly sticky Japanese inflation. 

The BOJ is expected to leave its benchmark rate at 1.25%, after raising the rate by 50 basis points so far this year. 

The central bank had during its September meeting signaled that it will continue to consider more rate hikes, with Japanese inflation seen moving closer towards its 2% annual target. 

Core consumer price index inflation rose to 2.1% in September, while underlying inflation rose to 2.4%. 

Japanese consumer inflation has steadily increased this year despite government subsidies on fuel and utilities, as rising energy and raw material costs factored into higher producer price index inflation. 

Recent reports said Japan is also planning to end its fuel subsidies by December– a move that could spur a sharp upward correction in inflation. 

Against this backdrop, the BOJ is broadly expected to maintain its hawkish bias. But uncertainty over the Japanese economy, amid growing headwinds from the Middle East conflict, is expected to temper just how aggressively the BOJ can hike rates in the coming months. 

“We forecast the BoJ will raise interest rates 25bp in December and follow that with another 25bp hike in March next year,” ANZ analysts said in a note. 

“The BoJ must also keep a watchful eye on growth developments… Amid elevated geopolitical uncertainty the growth backdrop has been uneven this year and does not warrant aggressive tightening,” ANZ analysts said. 

BOJ Governor Kazuo Ueda had signaled in September that the BOJ will remain on guard to raise rates further in the face of sticky inflation. 

The BOJ has raised rates by a cumulative 1.35% since early-2024, after it ended over a decade of ultra-loose policy. 

Prior to the BOJ’s decision, Tokyo CPI inflation for October is also due on Friday, and is likely to factor into future rate decisions by the central bank. 

How will the Nikkei 225 react? 

Japan’s Nikkei 225 benchmark logged wild swings in the run-up to Friday’s decision, hit chiefly by volatility in technology shares. 

Any hawkish comments from the BOJ are likely to further rattle tech valuations, given their sensitivity to interest rates. A stronger yen could also dent exporters, which make up a large portion of the Nikkei. 

But higher rates stand to benefit lenders and domestically-exposed sectors. Japan’s major banks have benefited greatly from rising domestic interest rates.

How will USDJPY react?

The Japanese yen has usually responded favorably to hawkish signals from the BOJ, with the USD/JPY pair– which gauges the amount of yen required to purchase one dollar– likely to fall.

The BOJ’s recent monetary tightening has also been motivated by a weak yen, with the central bank concerned that a soft yen could drive up import costs and further underpin inflation.

Japan and the U.S. had engaged in an unprecedented, joint intervention operation in August to support the laggard currency. But USDJPY has since recouped a bulk of its losses.