On October 16, japan Bank of Japan Policy Board member Takashi Ando stated in a speech that Japan has the conditions for policy normalization, and it is appropriate for the Bank of Japan to adopt a gradual interest rate hike approach.

Anda Masaki, regarding the timing of the highly anticipated Bank of Japan's interest rate hike, mentioned that there is currently no specific month under consideration, but it is necessary to avoid pushing Japan back into a deflationary state by hiking rates too early.

On the market side, today, the Japanese stock market suffered a heavy blow. As of the closing, the Nikkei 225 index plummeted over 730 points, a drop of 1.83%, closing at 39180.3 points; the Tokyo Electron index fell 1.2%, with the semiconductor sector leading the decline, Tokyo Electron Ltd. unsponsored ADR dropping over 9%.

It is worth noting that Barclays's latest report warned that the market may be underestimating the probability of a Bank of Japan interest rate hike. Barclays expects the Bank of Japan to raise rates by 25 basis points in December or January next year.

Bank of Japan speaks out

On October 16, Bank of Japan Policy Board member Anda Masaki stated in a speech that at the meeting in March this year, the Bank of Japan decided to abandon the negative interest rate policy and yield curve control (YCC), using short-term interest rate operations as the main policy tool. In addition, at the meeting in July, the Bank of Japan raised rates and gradually reduced purchases of long-term government bonds. Through these measures, the Bank of Japan is striving to achieve the 2% inflation target and promote policy normalization.

Anda Masaki pointed out that Japan has met the conditions for policy normalization. These conditions include: firstly, the year-on-year distribution of prices in all categories of the CPI no longer shows characteristics of a deflationary period; secondly, the CPI level has exceeded the peak before the deflationary period. However, in the process of moving towards normalization, it is necessary to avoid any sharp policy changes that could lead the market to expect a return to deflation.

Therefore, Anda Masaki believes that the Bank of Japan adopting a gradual interest rate hike approach is appropriate.

Analyst Ando Makoto stated that if the rise in underlying inflation is more driven by the increase in service prices, this will reduce the Bank of Japan's focus on the impact of a possible rate cut by the Federal Reserve. A rapid rate cut by the Federal Reserve does not necessarily mean that the Bank of Japan cannot raise rates. The Bank of Japan does not have a set pace for raising rates and must pay special attention to data on the actual economy.

Regarding when the Bank of Japan will raise interest rates again, Analyst Ando Makoto stated that there is currently no specific month under consideration. The previous rate hike measures have produced the expected results, but it is necessary to avoid pushing Japan back into deflation by raising rates too early.

Analyst Ando Makoto stated that the regional branch managers' meeting to be held by the Bank of Japan in January next year may provide clues about next year's wage prospects, which is one of the factors determining policy.

Potential rate hike risks

The current market consensus is that the Bank of Japan will abandon the idea of raising rates again before the end of the year.

A survey shows that close to 90% of economists expect the Bank of Japan to raise rates by the end of March next year. The survey results highlight the challenges the Bank of Japan faces in normalizing its policy. Currently, most central banks around the world tend to cut rates, and there is uncertainty about the monetary policy preferences of the new political leadership.

Chief Market Economist at Daiwa Securities, Mari Iwashita, stated that by the time the Bank of Japan publishes its quarterly outlook report in January next year, the conditions for a rate hike will be met. If the Bank of Japan wants to assess the feasibility of the new U.S. government's policies and the outcome of spring wage negotiations, the decision may be postponed until March.

However, Barclays' latest report warns that the market may underestimate the probability of a rate hike by the Bank of Japan.

Barclays' analyst Shinichiro Kadota and his team from the Japan Forex and Interest Rate Research Department released a report stating that the results of the late October Japanese House of Representatives election will impact the Bank of Japan's interest rate hike decision, specifically:

If the Liberal Democratic Party-Komeito coalition wins a majority of seats in the election, then the dovish comments of Fumio Kishida may decrease, and market expectations for the Bank of Japan's interest rate hike may strengthen;

If the Liberal Democratic Party-Komeito coalition loses its majority of seats, Fumio Kishida's dovish comments may continue until the Upper House election in July 2025, and continue to suppress market pricing for the Bank of Japan's interest rate hike;

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.

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%.

Editor/ping