MNI POLICY: BOJ's Tankan Raises Hike Odds, Ueda Speech Eyed

Solid business sentiment and earnings in September’s Tankan survey are likely to support a rate hike and increase the odds of an October move, although final decisions will depend on incoming data, with Bank of Japan Governor Kazuo Ueda’s upcoming speeches closely watched for any shifts in the Bank’s “no-rush” stance, MNI understands.

Japanese benchmark business sentiment improved for the second consecutive quarter, though sentiment among major non-manufacturers remained unchanged.

But policy decisions at the BOJ, like those at the U.S. Federal Reserve, ultimately reflect the governor’s judgment. If the Bank sees scope for an October rate increase, Ueda may adjust his assessment of trade policy and inflation relative to his mid-September remarks, particularly when he addresses business leaders and holds a news conference in Osaka on Friday.

In September, Ueda stressed that the full impact of U.S. tariffs on consumer prices and the broader economy remains unclear, calling for additional data before raising rates. He highlighted the need to monitor downside risks as tariff effects intensify, noting that underlying CPI inflation is slightly below 2%, though trending toward target. (See MNI POLICY: BOJ To Mull Phasing Out Underlying CPI)

Should Ueda downplay downside risks and highlight concerns about high prices weighing on consumer sentiment, markets may interpret this as keeping the October rate hike on the table. BOJ-dated overnight index swaps showed the probability of an October hike rose to roughly 65% from 30% prior to the September meeting following the Tankan’s publication Wednesday.  

Ueda is likely to signal clearly if an October rate hike remains under consideration to avoid surprising the market. The Bank could also be more inclined to act if the government pressures it to address a weak yen ahead of President Donald Trump’s potential visit to Japan, expected in late October or early November.

NO RUSH

While the survey does not impede a potential rate hike, the BOJ still sees no need to rush as upside risks to prices have not strengthened since July, and the effects of U.S. and global trade policies remain uncertain. 

Officials noted that limited trade impacts on the U.S. economy make it difficult to gauge downward pressure on Japan. The Bank has time to carefully evaluate the evolving economy and price trends, particularly the basis for wage growth in fiscal 2026. (See MNI POLICY: BOJ Sees No Need To Rush Rate Hikes)

However, a hike to 0.75% is expected to have minimal negative impact, as real rates remain low. The BOJ could potentially raise rates to 1% without major economic disruption, though increases beyond that will be considered cautiously while monitoring the effects.