Barclays said that Fumio Kishida's moderate remarks reflect his low support rate. According to media reports at the beginning of the month, Kishida's support rate is only 51%, one of the lowest among newly appointed prime ministers in modern Japanese history. Barclays believes that if the LDP-Komeito coalition wins a majority of seats in the election, Kishida's dovish remarks may decrease, the market's expectations of a BOJ rate hike may also strengthen, and the earliest rate hike is expected to be 25 basis points in December of this year.
Barclays believes that the market is underestimating the probability of the Bank of Japan raising interest rates due to Yoshihide Suga's dovish remarks and the relatively strong performance of the Japanese economy.
On Friday, October 11, Barclays Japan's forex and interest rate research department analyst Shinichiro Kadota and his team released a report stating that the results of the Japanese House of Representatives election in late October will affect the Bank of Japan's interest rate decision:
If the Liberal Democratic Party-Komeito coalition wins a majority of seats in the election, then Yoshihide Suga's dovish remarks may decrease, and the market's expectations for the Bank of Japan to raise interest rates will strengthen.
If the Liberal Democratic Party-Komeito coalition loses a majority of seats, Yoshihide Suga's dovish remarks may continue until the Upper House election in July 2025, further suppressing market pricing for the Bank of Japan to raise interest rates.
In addition, the Bank of Japan assesses that the Japanese economy is performing well overall, combined with cautious remarks from Masahiko Amakura, weakening the market's expectations for the Bank of Japan to raise interest rates.
Barclays expects the Bank of Japan to raise interest rates at a speed and magnitude exceeding the current overnight index swap (OIS) pricing. The Bank of Japan is expected to raise interest rates by 25 basis points in December this year or January next year, and then raise them again by 25 basis points in July to raise the rate to 0.75%.
In early August, due to market turmoil and the weakening of the Japanese yen, coupled with the approaching of the Liberal Democratic Party elections, market expectations for the Bank of Japan to raise interest rates plummeted significantly. However, despite Yoshihide Suga's victory with a hawkish stance throughout the election, and the Bank of Japan's assessment indicating a recovery in the Japanese economy, the pricing by the overnight index swap for the Bank of Japan raising interest rates has not returned to the level before the July rate hike.
The results of the Japanese House of Representatives election will affect the interest rate decision of the Bank of Japan.
Before the Liberal Democratic Party election, Shigeru Ishiba was seen as a representative of the hawkish monetary policy for supporting interest rate hikes. However, on the second day after being elected as prime minister, he made dovish remarks, saying, "I do not think we are in an environment that requires further interest rate hikes."
On October 27th, Japan will hold a House of Representatives election. Barclays stated that Shigeru Ishiba's moderate remarks reflect his low approval rating. According to the "Nikkei Economic News" report on October 2, Shigeru Ishiba's approval rating is only 51%, one of the lowest among new prime ministers in modern Japanese history.
Barclays believes that if the LDP-Komeito coalition wins a majority of seats in the election, Shigeru Ishiba's dovish remarks may decrease, and market expectations for the Bank of Japan to raise interest rates may strengthen. If the LDP-Komeito coalition loses its majority, Shigeru Ishiba's dovish remarks may continue until the Upper House election in July 2025, further suppressing market expectations for the Bank of Japan to raise interest rates.
In the highly unlikely event that the Japanese Constitutional Democratic Party takes over the government, the party's policy proposal is to lower the inflation target to "above 0%", which could lead to a significant rate hike by the Bank of Japan and a stronger yen.
The strong economic situation in Japan has restrained market expectations for the Bank of Japan to raise interest rates.
According to the economic assessment of the Bank of Japan, the Japanese economy is performing well overall. In the September meeting statement, the Bank of Japan raised expectations for private consumer spending, consistent with expectations for bottoming out of Japan's GDP growth in the first quarter of 2024. In addition, core inflation driven by imported commodity prices is extending to the service industry, reflecting strong results of Japan's spring wage negotiations (shunto), which are already evident in monthly wage data.
However, Bank of Japan Governor Kikuo Iwata maintained a cautious tone at a press conference after the meeting, emphasizing the need to confirm progress in service industry inflation and wage growth. He also added that the soft landing of the US economy and the correction of the weakening yen provided the Bank of Japan with some time. Iwata's comments weakened market expectations for a rate hike by the Bank of Japan.
Editor/Rocky
