MNI INTERVIEW: BOJ Dec Hike Possible - Ex-Chief Economist

The Bank of Japan’s next rate hike will come no earlier than December, but there is no guarantee the Bank will be able to move then given uncertainty over the U.S. and global economies, former chief economist Toshitaka Sekine told MNI.

“It is impossible for the Bank to ascertain the impact of trade policy on the U.S. and global economies, as well as on Japan, at the [Oct 28-29] policy-setting meeting,” said Sekine, now a professor at the School of International and Public Policy at Hitotsubashi University.

Sekine, who left the BOJ in 2020, believes the Bank needs to raise the policy rate “as of now,” but added that the outlook remains highly uncertain. “More economic materials to gauge the trade policy impact will be available at the December meeting, but I don’t know whether they will support a rate hike," he said. "There is the possibility that the Bank cannot raise the rate."

Markets have priced in a 40% chance of a rate hike at the Dec 18-19 meeting, having recently pared back expectations for an October move sharply following Governor Kazuo Ueda’s remarks last Friday.

However, Sekine stressed that current uncertainties are considerably greater than markets expect. While the BOJ risks falling behind the curve, serious developments in the U.S. and global economies could also have a significant impact on Japan, he cautioned. “The BOJ will have to compare the two risks, and it doesn’t need to rush to raise the policy rate amid adverse headwinds,” he said.

WEAKER YEN

A weaker yen is preferable as it benefits major exporters by boosting profits, Sekine said, noting that a stronger yen could lead automakers to enter a wage-cutting mode. "There are pros and cons to a weak yen," he said, pointing to its impact on import prices and public frustration with higher living costs. "Even if it weakens further, the government may not immediately call on the BOJ to take policy action,” Sekine continued.

The impact of trade policy on the U.S. economy remains uncertain, he said, adding the recent lack of U.S. economic data caused by the government shutdown is complicating assessment.

The BOJ will gain more clarity on wage prospects for fiscal 2026 toward the end of the year, once corporate profits for Q4 and the direction of the U.S. economy and Federal Reserve policy become clearer, Sekine added.

U.S. ECONOMY

He warned against premature Fed rate cuts amid still-high inflation, pointing to the Summary of Economic Projections that had penciled in one or two cuts this year on top of September's federal funds rate cut. The Fed had misjudged inflation during the pandemic, he added. "I’m worried about the risk that the Fed could face a situation of having to raise the policy rate again after cutting too early,” he continued.

But if the U.S. economy deteriorates significantly and the Fed moves to lower rates, the impact on Japan would be significant, he warned. “While inflation remains high in Japan, the BOJ could be forced to reverse course,” he said. Sekine warned in July the Bank's wages and services scenarios could force the BOJ to lower the 0.5% policy rate back to zero. (See MNI INTERVIEW: BOJ At Crucial Point; Zero Rate Return Possible)

He argued that the full impact of U.S. tariffs has yet to fully materialise as there is a time lag before they are passed through to selling prices, noting that Yale’s Budget Lab estimates the U.S. average effective tariff rate has reached about 20.2%. “My calculations show about 9% based on August import data," he continued

A weaker U.S. economy could worsen Japan’s wage negotiation environment, he added. “Looking ahead, the materials the BOJ must examine will only increase, so I have no intention of saying the Bank can certainly raise the rate in December,” he said.