What to watch for at the Bank of Japan’s October monetary policy meeting

By Leika Kihara

TOKYO (Reuters) – The Bank of Japan is holding a two-day policy meeting ending on October 31, days after a general election that will see new Prime Minister Shigeru Ishiba face a key test on his agenda: increasing wages support and revitalize the country’s weak region economies.

Here’s a guide to what to expect and why the BOJ’s interest rate review is important:

WILL BOJ RAISE INTEREST RATES?

The BOJ ended negative interest rates in March and raised its short-term monetary policy target to 0.25% in July. It has signaled a willingness to raise interest rates again once the board has enough confidence that Japan will sustainably meet its 2% inflation target.

However, with inflation holding steady at around 2% and showing few signs of rising, the BOJ is in no rush to pull the trigger.

The central bank is widely expected to keep interest rates steady at the October meeting as Governor Kazuo Ueda has stressed the need to take time to consider risks such as uncertainty over the U.S. economy and the impact of volatile markets.

Central banks typically avoid changing their policies in connection with major political events. The BOJ has plenty of reasons to stick with the cause, with a domestic election scheduled for Oct. 27 and a U.S. presidential election looming early next month.

What should markets pay attention to?

The BOJ has said it will raise interest rates again if the economy and prices develop in line with its forecast. That means the quarterly report, which will contain the board’s new growth and price forecasts, could provide clues as to the timing of the next rate hike.

Sources have told Reuters that the BOJ is unlikely to significantly change its forecast that inflation will hover around its 2% target by March 2027.

While such forecasts would set the stage for further rate hikes, the BOJ could signal a willingness to move more slowly by highlighting risks such as slow global growth and the damage that volatile markets could do to household and business sentiment.

If the Bank of Japan strengthens its warning about such risks or refers to them in the policy guidance part of the report, this could further reduce the likelihood of a rate hike at year-end. On the other hand, increasing optimism about continued wage increases could be a sign that the next interest rate hike is imminent.

The story continues

What else should markets pay attention to?

Governor Ueda’s post-meeting briefing, which will take place at 3:30 p.m. Tokyo time (06:30 GMT) on October 31, could provide clues about the pace and timing of further rate hikes.

In a briefing in September, Ueda dismissed signs of a pause, saying the Bank of Japan could “afford” to spend time reviewing risks.

His comments on the yen are also crucial as the currency’s sharp fall, which is driving up inflation via import costs, was among the factors that led to the BOJ’s rate hike in July.

The yen, while still below its three-decade low of nearly 162 hit in early July, fell to a two-and-a-half-month low of under 150 against the dollar on Thursday. A further decline in the yen could put renewed pressure on Ueda to withdraw more hawkish signals on the interest rate outlook.

What do analysts think about the timing of the next interest rate hike?

After the October meeting, the BOJ will meet for a policy meeting on December 18th and 19th, followed by a meeting on January 23rd and 24th.

A narrow majority of economists polled by Reuters expected the BOJ to refrain from raising interest rates this year, with most expecting the central bank to raise rates again by March next year.

What could hinder further tariff increases?

The BOJ has signaled its willingness to raise interest rates to a level neutral for the economy – estimated by analysts at around 1% – by around the end of next year or early 2026.

But the road could be bumpy. The BOJ hopes record wage increases offered by companies this year will boost consumption and allow retailers to further raise prices. But slowing global demand could stop manufacturers from offering big wage increases next year.

Political clouds also hang over the BOJ’s interest rate hike path. While Ishiba has said he will not interfere in monetary policy, the prime minister could resist further interest rate hikes if his ruling party performs poorly in the Oct. 27 election.

(Reporting by Leika Kihara; Editing by Sam Holmes)