MNI BOJ WATCH: Board Likely To Hold, Dec Rate Hike Eyed

The Bank of Japan Board is likely to keep its policy rate unchanged at 0.50% at the meeting ending Thursday, with officials concerned that a slowing U.S. economy could weigh on Japan’s growth and inflation.

While inflation remains above the 2% target, the BOJ sees no urgent need to hike, with downside economic risks dominating its risk-management approach. Inflation expectations have not accelerated, reinforcing a wait-and-see stance. (See MNI POLICY: BOJ's Concerns Grow Over Slowing Price Hikes) Policymakers believe it will not be too late to consider a move in December once they have reviewed fresh data.

The bank will reassess economic and price conditions at that meeting, closely watching developments in the U.S. economy and financial markets after the Federal Reserve’s policy decisions. Officials judge that the outlook for achieving the 2% target is broadly on track, with the probability of meeting the goal increasing. They continue to expect the economy to achieve the target in the second half of the projection period.

The Board has held the policy rate steady since January, with markets only pricing in a 10% chance of a move higher this week. 

INFLATION CONSIDERATIONS

Recent increases in food prices appear to have peaked, with limited spillover into broader prices, and the decline in crude oil costs is easing upside risks. The Board’s GDP growth forecast for this fiscal year is also expected to be revised up to around 1% from 0.6% in July.

The BOJ is also likely to keep its assessment that price risks are “balanced,” with no substantial shift in board members’ views to tilt the overall risk bias higher. (See MNI POLICY: BOJ Board Likely To Maintain Price View)

Officials are focused on the degree of third-quarter GDP contraction, due Nov. 17, to gauge the impact of U.S. trade policy tariffs and refine their economic outlook. They believe wage momentum remains supported by labour shortages and high corporate profits, but are looking to upcoming corporate commentary on wage plans toward year-end.

TRADE UNCERTAINTY

Bank officials judge that the risk of a sharp U.S. downturn has diminished, but expect the pass-through of tariffs to selling prices to accelerate gradually, adding upward pressure to inflation. The BOJ has also flagged uncertainties over U.S. trade policy and domestic fiscal expansion, and is increasingly focused on the global implications of the artificial intelligence boom (AI) and high stock prices. Robust capital investment by the AI sector and strong spending by wealthy households are complicating assessments of U.S. economic resilience.

Officials note that the pass-through of tariffs to U.S. consumer prices has been moderate so far, helping sustain household spending. But if corporate profits fall short of stock market expectations, global equity prices could face downward pressure, dragging on the U.S. and global economies.

The bank does not expect the AI boom to burst soon, but warns that a sharp correction could trigger significant market turbulence and destabilise global growth.