Following Japanese Prime Minister Shigeru Ishiba's announcement of his intention to resign, the Bank of Japan faces new variables in this week's policy meeting, with markets broadly expecting the central bank to maintain its 0.5% benchmark rate unchanged.
According to a survey of 50 economists, all respondents predict that the two-day meeting ending Friday will keep rates unchanged, while sources indicate that BoJ officials are still assessing the impact of U.S. tariffs on domestic and international economies. This shifts market focus to October rate hike possibilities—over one-third of respondents expect a rate increase to 0.75% at that time, with attention on whether BoJ Governor Kazuo Ueda will rule out this option.
Despite the BoJ emphasizing policy independence, political changes and Federal Reserve rate decisions may still influence decision-making. U.S. potential rate cuts and yen exchange rate volatility remain under scrutiny, as dollar weakness could boost the yen and impact the export-oriented economy.
BoJ officials believe that despite political instability, if economic data meets expectations, rate hikes remain possible before year-end. Since late July, following U.S.-Japan tariff negotiations, the U.S. signed an executive order reducing automotive tariffs to 15%, while economic data has performed strongly: revised GDP exceeded expectations, and key inflation indicators have maintained at or above the 2% target level for over three consecutive years, supporting rate hike expectations.
Societe Generale's Chief Japan Economist Jin Kenzaki expects an October rate hike to 0.75% due to steadily rising underlying inflation. However, political uncertainty has intensified following Ishiba's resignation, with the LDP coalition failing to secure majority seats in both houses of parliament. The new LDP leader taking office on October 4 may face cabinet formation difficulties, and if Sanae Takaichi is elected, her previous warnings against "premature rate hikes" could delay the tightening process. Institutions including BNP Paribas and Barclays have therefore postponed their original October rate hike expectations.
Historical coordination between the BoJ and government shows that conflicts arose due to policy disagreements during economic normalization phases, but concerns dissipated after large-scale easing in 2013. Currently, the central bank closely monitors the possibility of a U.S. economic soft landing and risks from weakening employment data, with the sustainability of corporate profits and wage growth being key factors.
U.S. manufacturing pretax profits fell 11.5% in the April-June period, with transportation equipment manufacturing plunging 29.7%. If the world's largest economy slows more than expected, Japanese corporate profits will face pressure, suppressing wage growth and breaking the virtuous inflation cycle.
The Federal Reserve's pace of rate cuts directly affects yen movements: rapid appreciation exacerbates corporate profit contraction, while excessive depreciation could push up import inflation, forcing the BoJ to accelerate rate hikes. Last week, U.S. and Japanese finance ministers reiterated their commitment not to seek competitive advantages through exchange rates, with some analysts interpreting this as the U.S. hinting that Japan should correct yen weakness through rate hikes rather than intervention.
This week's BoJ policy statement is expected to show little change, with Governor Ueda's press conference becoming the focal point. Former BoJ official Shinyas Atago from Rakuten Securities notes that Ueda needs to balance dovish and hawkish statements—being too dovish could trigger yen depreciation, while being too hawkish might shock markets. The survey shows that over half of observers believe Ueda tends toward dovishness when maintaining rates and hawkishness when hiking.
On October 3, Governor Ueda will deliver an important speech that may hint at whether action will be taken at the October 29-30 meeting. Nomura Securities Chief Strategist Naka Matsuzawa believes the next rate hike will come at the earliest in December, with the baseline scenario being January, as Fed rate cut expectations have been partially digested, reducing the urgency for BoJ action.