MNI BOJ WATCH: Board To Hold, Monitor Markets, U.S. Economy

MNI (TOKYO) - The Bank of Japan board will likely leave its policy interest rate at 0.25% when it concludes its two-day meeting on Thursday amid unstable financial markets and uncertainties over a U.S. soft-landing, with attention shifting to further wage data and Board communications that could offer insight into the chances of a December increase.

The BOJ’s focus has shifted to how uncertainty on the U.S. economy will evolve and if concerns over volatile financial markets ease before the Dec 18-19 meeting. 

While Bank officials believe the U.S. economy is on track for a soft-landing, they need further data on wages, the U.S. economy and markets to confirm their view, which could lead the board to postpone a further hike until January. Governor Kazuo Ueda has repeatedly stressed the Bank's desire to monitor the global economy and prices. (See MNI BOJ WATCH: Ueda Says BOJ Has Time To Watch Price Moves)

The BOJ overnight index swaps markets see little chance of a hike this week or the December meeting, but have priced in a 0.38% rate at the Jan 23-24 session. 

However, Bank officials see the need to increase and improve communications with market players through board member speeches if conditions warrant a rate hike in December. (See MNI POLICY: BOJ Watching Potential JGB Hike Risk Underpricing) Attention should be paid to an annual speech delivered by Ueda to Nagoya City business leaders in November to gauge December’s chances. 

The board last hiked the policy rate to 0.25% from a range of zero percent to 0.1% in July.

OCTOBER CPI KEY

Policymakers will weigh rate hike chances in December after examining the evolving nationwide October CPI due Nov. 22 and gauging the strength of the relationship between wages and prices. 

The October Tokyo CPI data showed steady upward price momentum, particularly from services, which rose 0.8% y/y in October from September’s 0.6%. While the year-on-year rise in the Tokyo core inflation rate slowed to 1.8% in October from September’s 2.0%, the core-core CPI – a key indicator in the underlying trend of inflation – rose 1.8% y/y, accelerating from September’s 1.6%. Restaurant prices also rose 3.6% versus 3.1% the prior month.

While the upside risk to prices eased as the yen strengthened from its JPY160 low against the U.S. dollar, bank officials remain vigilant against a weaker currency driven by a solid U.S. economy and speculation over the U.S. presidential election results.

OUTLOOK REVIEW

Policymakers will review the medium-term economic growth and inflation view at this week’s meeting, but the board’s median forecasts for the core CPI this fiscal year and fiscal 2025 and 2026 are likely to be little changed from July’s 1.9%, 1.9% and 2.1% predictions. However, policymakers will likely consider adjusting the upside risk to prices this year and fiscal 2025 to neutral.

BOJ officials are increasingly confident wage hikes in fiscal 2025 will meet expectations on the back of strengthening labour shortages and favourable corporate profits, but the scale of base-pay hikes at major firms – made available toward the end of this year and the beginning of 2025 – remains an area of concern as these increases will influence smaller firms.