(Bloomberg) -- The Bank of Japan kept policy unchanged Friday as it avoided a repetition of the market meltdown that followed its July rate hike, while still keeping the ground prepared for a ramping up of borrowing costs in the coming months.
The immediate market reaction was muted this time, with stocks maintaining their gains and only a relatively small strengthening of the yen after the BOJ met expectations by holding the unsecured overnight call rate at around 0.25%.
In a busy week for central banking that saw the Federal Reserve finally embark on rate cuts, the BOJ was expected to stand pat by all economists surveyed by Bloomberg.
A hold decision seemed almost certain given the need to monitor the impact of July’s rate increase and to avoid spooking markets again with a surprise. Standing pat also kept the bank out of the spotlight as Japan’s Liberal Democratic Party chooses a new leader to take on the role of prime minister.
The bank raised its assessment of consumer spending, a key engine of economic growth, and cited the need to monitor financial markets. Following another uptick in the inflation rate, it also reiterated that it expects price growth to continue in line with its goal in the latter half of its projection period.
“The BOJ is indicating it’s on track for another rate hike,” said Jin Kenzaki, head of Japan research at Societe Generale SA.
That switches the focus to any hints Governor Kazuo Ueda might give on the likely timing of the next hike during his press briefing at 3:30 pm in Tokyo.
Most economists doubt that the central bank will hike at its meeting in October, partly due to the possibility of a national vote in Japan just before the US chooses its next president.
“October seems too early given the likelihood of not enough data to back up an additional hike and a general election likely taking place soon after the LDP election,” Kenzaki said. “I continue to expect that the next move will take place in December.”
Market pricing indicates investors are less convinced than economists that the central will move again by the end of the year. Overnight-indexed swaps, which tend to be volatile, veered Friday between suggesting zero and 77% odds of a 25 basis points hike this year. About 70% of economists surveyed by Bloomberg expect another increase by December.
The BOJ took out from its policy statement a mention of its stance on continuing to raise the policy rate if the outlook for economic and activity is realized. The bank used the phrase in an explanation of its rate hike decision and policy direction in July. While the removal of the line matched the pattern of explanatory text in recent statements, its repeated inclusion might have overemphasized the BOJ’s appetite to hike.
What Bloomberg Economics Says...
“Ueda will probably balance two main considerations — the risk that a hawkish BOJ sets off more market turbulence, against growing confidence — backed by recent data on wages and prices — that its 2% inflation target is increasingly secure. Our baseline view is that Ueda will send a subtle signal that the BOJ will be prepared to hike in October, if conditions are right then.”
— Taro Kimura, economist
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The board’s two-day meeting kicked off hours after the Federal Reserve conducted a long-awaited policy pivot with an outsized interest rate cut. In doing so, the Fed joined developed market peers including the Bank of England and European Central Bank in launching an easing cycle, a development underscoring the BOJ’s outlier status as the only major central bank on an upward course.
“I think that the timing of next rate hike will depend on the economic conditions overseas in the coming months, especially in the US,” said Chotaro Morita, chief strategist at All Nippon Asset Management Co. “I see this as rather delaying the BOJ’s policy decisions.”
With the Fed’s move Wednesday intensifying momentum for a global easing campaign, views among BOJ watchers are divided on what sort of trajectory to expect in Japan.
The August market meltdown in the wake of that move triggered the biggest plunge by the Nikkei 225 index in its history, wiping out $1.1 trillion from Japan’s stock market over the course of three trading days. While stock prices have since pared losses, volatility in the market has stayed at the highest among major global indexes.
The Topix was up 1.5% as of 2:11 p.m. in Tokyo. Benchmark 10-year bond yields rose 0.5 basis point to 0.85% and the yen gained 0.2% to 142.30 versus the dollar.
The market’s impact on the economy remains to be seen. Meantime economic data in recent weeks have offered encouraging signs for more rate hikes in the form of solid wage gains and steady inflation. That explains why 53% of economists see a risk of a rate move at the next meeting in October.
It also remains to be seen if a new prime minister will impact the speed of hikes. The LDP chooses its new leader on Sept. 27. The party’s dominance in parliament all but assures that its leader will be named premier in the days following the party poll.
Among the nine candidates running, Sanae Takaichi would be the one most likely to complicate the BOJ’s policy normalization plans, as she is known to be an advocate of monetary easing, according to 86% of 36 economists.
Still, BOJ officials don’t expect a new leader to push for drastic changes in monetary policy, as the ruling party is on board with the bank’s pursuit of its stable inflation target, people familiar with the matter told Bloomberg earlier.
--With assistance from Yoshiaki Nohara and Erica Yokoyama.
