Bank of Japan's rate hike expectations cool this month! Sources: the next rate hike may come as early as December

According to Layoffs Finance APP, sources reveal that Bank of Japan officials are inclined to oppose a rare consecutive rate hike this month, but are still considering the possibility of another rate hike as early as December. Sources said that Bank of Japan officials believe there is little need for consecutive rate hikes in the absence of signs of a sudden surge in inflation risks. The sources added that the Bank of Japan will instead carefully examine economic data to determine whether another rate hike is needed as early as the December policy meeting.

However, sources said the final policy decision at the October 30 meeting could still change at the last minute. This indicates that the Bank of Japan has not completely ruled out a rate hike in October, but at this stage prefers to observe the effects of the previous rate hike on the economy and prices before deciding on the next move.

After the news broke, the yen initially weakened but then recovered some ground. As of press time, the USD/JPY exchange rate edged down to 158.08.

Last month, under the leadership of Bank of Japan Governor Kazuo Ueda, the policy board raised borrowing costs to 1.25% in response to rising inflation risks. The September rate hike marked the second increase by the Bank of Japan in three months, representing the fastest pace of hikes since 1990.

Kazuo Ueda stated that with the Bank of Japan now entering a new policy phase focusing more on upside inflation risks, the latest rate hike was justified. The move also came as US Treasury Secretary Bessent continued to place pressure—Bessent demanded that the Bank of Japan continue with monetary policy normalization and help strengthen the yen.

However, since 1980, the Bank of Japan has never hiked rates for two consecutive months, indicating the central bank’s long-standing tendency to assess the impact of policy changes before determining whether further action is necessary.

Pricing in the overnight index swap market shows that traders now see about a 10% chance of another Bank of Japan rate hike this month, while the probability rises to 88% by December. In last month's survey of economists, around one-third expected the Bank of Japan to hike rates in December, while over half predicted the central bank would wait until January next year to act.

In late September, market bets on a Bank of Japan October rate hike once surged to about 40%. However, after US Federal Reserve officials sent clear signals that the Fed would not hike rates this month, expectations for a Bank of Japan rate hike in October diminished accordingly.

The Bank of Japan waits for a suitable timing for the next rate hike; price stability is key

According to sources, Japan's economic and inflation trends have largely been in line with the Bank of Japan's expectations, and it is anticipated that within the next 18 months, the price trend will at some point align with the 2% inflation target.

Although, more than ten years after setting its inflation target in 2013, the Bank of Japan can finally consider the underlying inflation rate to be about 2%, this does not mean the central bank's mission is complete. Sources noted that the goal of the Bank of Japan is not simply to achieve 2% inflation, but more importantly, to ensure inflation remains stable around this level. Kazuo Ueda also spoke to this point during his speech in parliament on Tuesday, stating that keeping the inflation trend stable at around 2% is crucial.

The latest price data show that inflationary pressures in Japan have not faded. Japan’s September Corporate Goods Price Index (CGPI) rose 6.8% year-on-year, down from 7.6% in August, indicating a slowdown in the rate of increase and suggesting that the Bank of Japan is not under pressure to act immediately. The Import Price Index in yen terms surged by 24.5% year-on-year, indicating that a weak yen continues to push up import costs, and the Bank of Japan must assess how much the rise in wholesale prices is being passed on to consumer prices.

At the same time, household inflation expectations also remain high. A Bank of Japan survey showed that 88.6% of households expect prices to rise in the coming year, down from 90.4% in the previous survey; the percentage expecting a price rise over the next five years rose to 86.5% from 86.1% in June.

According to sources, with the underlying inflation rate approaching the Bank of Japan’s target, the central bank will continue searching for a suitable timing for another rate hike while assessing the impact of rate hikes so far. In addition, the Bank of Japan has pledged to closely monitor Middle East developments, AI-related demand, and foreign exchange rate changes to determine when to raise rates again.

On October 30, the Bank of Japan will announce its interest rate decision and release the latest quarterly economic outlook. Sources indicate that officials will assess the impact of high oil prices and consider whether to factor into economic forecasts a temporary cut to the yet-to-be-implemented food consumption tax. Since late July, when the Bank of Japan last updated its quarterly economic outlook, oil prices have risen by about 15%, exacerbating Japan’s inflation pressures. Given its heavy reliance on natural resource imports, Japan is more vulnerable to rising energy prices.