BOJ Expected to Keep Rates Steady

The Bank of Japan (BOJ) is set to maintain its ultra-low interest rate policy at its upcoming meeting on October 30-31, but may signal a less dovish stance, reports Reuters. This shift could be driven by receding fears of a US recession and the need to prevent further yen depreciation.

Since ending its decade-long, radical stimulus program in March, the BOJ has hinted at gradual rate hikes. However, a July rate hike triggered a market rout, forcing the central bank to temper its hawkish tone.

While the BOJ remains in no hurry to raise rates, analysts believe that a less dovish message could help to manage market expectations and prevent the yen from falling further, which could hurt consumption by driving up import costs.

"As the yen is falling again, the BOJ will probably try to avoid sending a message that would appear too dovish," said Ryutaro Kono, chief Japan economist at BNP Paribas, to Reuters.

The BOJ is widely expected to keep short-term interest rates unchanged at 0.25% at the meeting. The board is also unlikely to make significant changes to its inflation projection, which currently expects inflation to hover around 2% until early 2027.

Recent domestic data has supported the BOJ's view that rising wages and sustained wage growth are bolstering consumption and prompting companies to raise prices for both goods and services.

"Japan's economy is on track for a recovery," said a Reuters source familiar with the BOJ's thinking. "Prices will likely keep rising as many companies have yet to fully pass on rising costs," another source added.

The BOJ may reflect this progress in its quarterly report, emphasizing the increasing likelihood that the prerequisites for further rate hikes are being met.

Striking the Right Balance

While the BOJ may signal a less dovish stance, the market will likely focus on the central bank's assessment of risks, particularly in light of Governor Haruhiko Ueda's concerns about volatile markets and US recession fears.

Following his meeting with counterparts from major economies in Washington, Ueda offered a cautiously optimistic view on the global economy. "Optimism over the U.S. economic outlook appears to be broadening somewhat," he said on Thursday.

The BOJ may also modify its future policy guidance in its report. The current report issued in July stated that the BOJ would continue to raise rates if economic and price conditions moved in line with its forecast.

The BOJ's communication strategy is complicated by political uncertainty and the yen's renewed decline. While the bank aims to move cautiously to avoid disrupting markets, sounding too dovish could encourage speculators to sell the currency. Ueda acknowledged this dilemma in Washington.

"When there's huge uncertainty, you usually want to proceed cautiously and gradually. But the problem here is if you proceed very, very gradually and create expectations that rates are going to stay at low levels for a very long time, this could lead to a huge build-up of speculative positions which could become problematic," Ueda told an IMF panel earlier this week. "We need to strike the right balance."