On October 31, the Bank of Japan kept the benchmark interest rate unchanged at 0.25%, a decision that received unanimous approval internally and was in line with market expectations.

The minutes released today show that policymakers unanimously believe that if their economic and price forecasts meet expectations, the central bank will continue to raise interest rates.

Policymakers emphasized the need to carefully study the impact of overseas economic uncertainty and financial market instability on the Japanese economy. While raising interest rates is still under consideration, the Bank of Japan is temporarily maintaining a cautious stance, considering concerns about the economic downturn in the USA and global economic uncertainties.

Divergence in policy direction?

The minutes of the September meeting show internal disagreements within the Bank of Japan regarding the direction of policy.

On one hand, some members stated that if economic and price expectations are met, the central bank will continue to raise interest rates. Commissioners unanimously agreed that due to the ongoing market instability, the Bank of Japan must closely monitor market developments and overseas economic prospects.

At the same time, some members argued that even in unstable markets, raising interest rates at times is appropriate. The Bank of Japan should gradually increase the policy interest rates to reach 1% in the latter half of the 2025 fiscal year.

On the other hand, some experts believe that due to the high uncertainty in finance and economy, it is not appropriate to change the policy interest rate level now. They suggest that the Bank of Japan should postpone raising interest rates until the global market uncertainty diminishes.

In addition, some members pointed out that the Bank of Japan must review data, focus on downside economic risks. Some members also mentioned that the Bank of Japan has the capability to take time to carefully study the impact of overseas market developments on the Japanese economy and prices.

Furthermore, members also emphasized that given the market's instability, the Bank of Japan must closely monitor market dynamics and overseas economic prospects, carefully examine the factors behind market fluctuations, not just market trends, including the developments in the USA and overseas economies.

Regarding the impact on Japanese business owners, the minutes show that business owners should pay attention to the Bank of Japan's interest rate hike trends, especially against the backdrop of global economic uncertainty, raising interest rates may affect financing costs and market liquidity.

The Bank of Japan specifically mentioned the instability in overseas economies and financial markets, businesses should consider these external factors in their international operations affecting the Japanese market. Additionally, the yen's rebound may alleviate pressure on import costs, businesses should consider the impact of yen exchange rate fluctuations on cost control and price adjustments when formulating financial strategies.

Could the next interest rate hike be in January?

Former Bank of Japan board member, Sakurai Makoto, stated on Tuesday local time that the Bank of Japan may raise interest rates in the coming months, with the most likely timing being January next year, when the political and market situation will be clearer.

He pointed out that the Bank of Japan's ultimate goal is to raise short-term borrowing costs from the current 0.25% to 1.5% or 2% by the end of Bank Governor Kuroda Haruhiko's term in April 2028.

Due to the continued political instability domestically, taking action in December could be very tricky. The possibility of a rate hike in January seems more likely, as the Bank of Japan will release more data, including whether consumer and wage growth will continue.

In addition, the leader of the opposition party that the ruling Liberal Democratic Party of Japan is seeking support from also warned the Bank of Japan again not to raise rates prematurely during an interview.

Yukio Edano, the leader of the Constitutional Democratic Party of Japan, stated that there should not be a significant change in monetary policy, as it is necessary to observe the wage growth trend in the spring negotiations next year.

Maintaining loose monetary policy could suppress the yen. However, it is the strength of the U.S. economy that creates a large interest rate gap between the USA and Japan, and monetary policy should not be used to manipulate exchange rates.

The U.S. midterm elections also have an impact on the decision of the Bank of Japan. Citi believes that if the “red wave” accelerates the depreciation of the yen, it may force the Bank of Japan to raise rates in December.

The Bank of Japan is well aware that a shift to a more urgent timeline could prompt the financial markets to incorporate expectations of a rate hike in December or January into pricing. However, if a more dovish stance, like in September, may rekindle the upward risk of import inflation, a more ambiguous “hawkish” view may be a wiser choice.

Editor/Rocky