Bank of Japan (BOJ) Governor Kazuo Ueda faces a delicate balancing act this week: keeping markets informed of future rate hikes without creating turbulence as the central bank stands firm on its current policy.
All 53 economists surveyed by Bloomberg anticipate that Ueda and his team will leave the benchmark interest rate unchanged at 0.25% when the two-day meeting concludes on Friday. Interestingly, nearly 70% of them predict a rate hike by December, emphasizing how critical the BOJ’s communication will be this time around. The central bank came under fire for not adequately preparing the market before its rate increase on July 31, which triggered volatility across financial markets.
The BOJ’s gathering will take place just hours after the Federal Reserve is expected to make a pivotal shift toward an easing cycle following its aggressive tightening since 2022. A change in Fed policy will further highlight the BOJ’s unique trajectory as it edges toward normalizing rates—a process that began in March with its first hike in 17 years. Given market uncertainty over the magnitude of the Fed’s rate cut, the potential for renewed market volatility adds another layer of caution, giving the BOJ more reason to hold its current stance.
Ongoing political developments in Japan, including a leadership election within the ruling Liberal Democratic Party, also contribute to the belief among economists that the BOJ will maintain its policy settings for now. Ueda’s task is to remind investors that this holding pattern is temporary while preparing the market for possible moves later in the year, most notably in December, which economists see as the most likely timeline for the next hike.
“This meeting is a key opportunity to understand the BOJ’s stance,” said Taro Kimura, an economist at Bloomberg Economics. “If there’s any chance of a rate hike in October, Ueda will likely signal that at this gathering.”
In July, after raising rates for the second time this year, Ueda’s hawkish comments rattled global markets, causing a surge in the yen and pushing speculative traders to close their yen-carry positions. The result was a sell-off in risk assets and the largest daily drop in Japanese stocks on record. Since then, Japan’s equity markets have remained volatile, prompting lawmakers to demand an explanation for the BOJ’s monetary policy at an unusual five-hour parliamentary session.
BOJ officials are wary of attracting renewed political attention as the country heads into a political transition. The race for leadership of the Liberal Democratic Party began last week, with the winner almost guaranteed to become the next prime minister. Despite the focus on the U.S. economy as a key driver of the recent market turmoil, BOJ insiders recognize that their policy decision in July likely contributed to the volatility. A BOJ board member even expressed frustration over how the bank handled its messaging efforts, highlighting the need for clearer communication.
“I believe there was room for better communication, especially regarding timing,” noted Naoki Tamura, one of the BOJ’s nine board members. “Improving our communication efforts is crucial.”
Going forward, the BOJ has taken steps to be more transparent. In the past month, five board members, including Ueda, have indicated that the bank will raise rates when its price targets align with its current projections. Tamura, the board’s most hawkish member, mentioned that the policy rate might need to rise to 1% in the latter half of the BOJ’s current projection period, which spans from October 2024 to March 2027.
Despite the BOJ’s more cautious stance following market volatility, insiders suggest that another rate move could occur later this year or in early 2025, depending on economic and financial market conditions. Recent data show Japan’s wages experiencing their biggest gain in 31 years, while revised GDP figures confirm the nation’s economic recovery. Both developments are seen as setting the stage for another rate increase.
“The BOJ became more cautious after the market turmoil shook its top officials,” said Izuru Kato, chief economist at Totan Research. “However, the core policy remains unchanged, and they will likely proceed with a rate hike in December, assuming the Fed’s rate cuts and U.S. election do not cause major disruptions in the global economy.”
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