Bank of Japan to remain on hold until political uncertainty clears up

Comments ahead of the Bank of Japan meeting on 30-31 October by Gregor MA Hirt , Global CIO Multi Asset.

• We expect the Bank of Japan to stay on hold in October. Amid high political uncertainty ?after the loss of a clear majority for the ruling coalition in Japan and the US election next week, we expect the BOJ to take no action at this time.
• Economic developments have so far been in line with the BOJ’s outlook and do not force the BOJ to act quickly at the October meeting.
• Points to watch will be if there are meaningful adjustments to the outlook report and if the recent weakness of the Japanese yen will be addressed in any way.

Recent economic data confirms the path of the Bank of Japan. The prerequisites to continue hiking interest rates are still in place. Nevertheless, the BOJ’s messaging ?indicates that there is no rush to adjust interest rates at the next meeting in October. In our view, there are two primary reasons for this.

Firstly, the BOJ seeks confirmation on economic trends in the US and Japan. The Japan October CPI provides insights into corporate price setting behavior as the fiscal year’s second half begins. More information on next year’s spring wage negotiation targets will also become available. Rengo has already announced a target of “5% or more”[1],meanwhile, steady US data may further act as support for the Japanese economy.

Secondly, political uncertainty remains elevated. The loss of a majority for the LDP/Komeito coalition complicates forming the next government as another coalition partner will be needed. The US election is also only days away and policy trajectories and market reactions are highly uncertain. In light of these risks, the BOJ will likely prefer to wait until December for a clearer outlook.

Either December or January could bring the next rate decision, depending on election outcomes, economic developments and yen performance. Recent depreciation of the Japanese yen could accelerate a response in case the currency weakness re-introduces upside risks to the inflation forecasts. For October, revisions to the new outlook report could provide important insights, as well as potentially address the recent Yen weakness.

In this environmentwe now adopt a mostly neutral view on Japanese government bonds. Yields have repriced. While there may still be further upside during the hiking cycle, the pace is likely to moderate, and the risks are more balanced. For the Japanese yen, we adopt a moderately constructive stance. Momentum has turned negative again, but we remain constructive in the longer term as valuation remains attractive and yield differentials moderate. On Japanese equities, we are still moderately constructive as structural domestic drivers remain in place and the world economy is growing at a sufficient pace. Still, there can be some near-term volatility until political uncertainty is resolved. The election outcome in Japan possibly creates some delay until the market regains confidence again that the overall policy trajectory will not be altered too drastically. Still, our conviction is higher for opportunities in other equity markets at this time. ?

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[1] JUTC-RENGO, Oct 2024 https://www.jtuc-rengo.or.jp/activity/roudou/shuntou/index2025.html#matome