Recently, the Bank of Japan has once again 'changed its face' and hawkishly stated: if the economic and inflation data meet expectations, it will continue to raise interest rates. However, Goldman Sachs believes that confirming the rebound in inflation will take time, and the best timing for the next rate hike by the Bank of Japan is still January next year.

On September 12, Goldman Sachs released a research report stating that the Bank of Japan will carefully assess the timing of the next rate hike from two perspectives: the stability of the financial markets and potential inflation. The bank continues to view the October price revision period as a turning point for Japan's inflation trend, when inflation will gradually rise along with prices, with January next year being the best time to determine whether inflation rebounds. Therefore, Goldman Sachs's current basic prediction is for the Bank of Japan to raise interest rates in January next year.

However, the financial market environment is unpredictable. Goldman Sachs believes that if there is major turmoil, Japan's economic data may fall below expectations, leading to a delay in rate hikes. If the financial markets remain stable and the data performance is consistent, it is also possible for the Bank of Japan to raise interest rates in December this year.

For the upcoming monetary policy meeting on September 19th to 20th, Goldman Sachs expects the Bank of Japan to stand still and keep the policy interest rate unchanged at 0.25%.

Goldman Sachs: October will be the turning point for inflation, January will determine whether inflation rebounds.

Goldman Sachs stated in the report that after the rate hike by the Bank of Japan in July, economic data and inflation trends were essentially in line with the Bank of Japan's expectations. Japan's GDP growth rate for the second quarter of this year rebounded from -0.6% in the first quarter to 0.8%. In terms of inflation, wage increases have transmitted to service prices, and the Tokyo CPI accelerated by 2.6% year-on-year in August.

At the same time, Goldman Sachs continues to view the October price revision period of this year as a turning point in Japan's inflation trend, when the accelerated wage increases will transmit to service prices, and inflation will gradually rise along with prices. The bank speculates that the best timing to confirm the rebound in inflation is January next year. Based on this, Goldman Sachs maintains its basic prediction for the Bank of Japan to raise interest rates in January 2025. The bank wrote:

The best time to determine whether inflation will rebound when the base price rises is January 2025, because the Bank of Japan needs to consider not only the CPI trend starting in October, but also the pricing behavior of small and medium-sized enterprises in micro-level information.

The financial market is still volatile, and there is still uncertainty about the timing of the next interest rate hike.

Goldman Sachs believes that the Bank of Japan's decision to raise interest rates still needs to focus on whether the financial market is stable.

Last month, on August 5th, the global financial markets experienced a major turmoil, with the situation in the Japanese capital market being particularly dire, with stock indices falling globally. After the turmoil, the Deputy Governor of the Bank of Japan came forward to calm the market, publicly stating that if the financial market is unstable, they will not raise interest rates. He said at the time,

Due to the extremely unstable development of domestic and international financial and capital markets, the Bank of Japan currently needs to maintain loose monetary policy and interest rates. When the financial market is unstable, the Bank of Japan will not raise interest rates...

However, as Japanese stocks emerge from the gloom and the yen has been rebounding since August, Goldman Sachs believes that the inflation risks brought by the depreciation of the yen have subsided, which was once considered one of the reasons for an interest rate hike in July. The bank added that in their view, there is no reason for the Bank of Japan to rush to raise interest rates again.

However, the financial market is unpredictable, and there is still uncertainty about the timing of the Bank of Japan's next interest rate hike, and the possibility of an interest rate hike in December this year has not been ruled out. Goldman Sachs wrote,

The timing of the Bank of Japan's next interest rate hike remains highly uncertain. If the financial market suffers a significant decline due to concerns about a recession in the US economy and other factors, the pace of economic activity and price inflation trend in Japan may be lower than expected, and an interest rate hike may be delayed. If economic, wage, and price data continue to show stability and the financial market remains relatively stable, an interest rate hike in December (this year) is possible.

Bank of Japan hawkish again: if the data meets expectations, it will continue to raise interest rates.

A few days ago, Bank of Japan Governor Haruhiko Kuroda reiterated in a document that the central bank will continue to raise interest rates if economic and price data meet expectations.

According to Bloomberg, Haruhiko Kuroda submitted a document to the government's economic and fiscal policy committee explaining the Bank of Japan's policy decision in July. The document shows that Kuroda stated that the economic environment remains accommodative even after the interest rate hike in July, as the real interest rate is still significantly negative.

On Thursday, hawkish Bank of Japan committee member Naoki Murata said that the Bank of Japan should accelerate the pace of interest rate hikes so that the rate can reach 1% as early as October 2025. He also stated that the conditions for further interest rate hikes by the Bank of Japan are gradually maturing as the possibility of sustainably achieving the 2% inflation target increases.

Editor/ping