Bank of Japan holds policy steady amid political uncertainty

Summary

• The Bank of Japan (BoJ) held monetary policy steady at today's announcement, reiterating that it would encourage the uncollateralized overnight call rate to remain at around 0.25%.

• The BoJ kept its forecasts for an ongoing economic recovery and price pressures that remain around its 2% target in the medium term largely unchanged, and noted that if this outlook is realized, the central bank can continue to raise its policy rate. In his post-meeting press conference, Governor Kazuo Ueda echoed this sentiment as well as suggested that the current political uncertainty in Japan may not play an outsize role in determining the future path for the central bank's policy rate.

• In terms of recent political developments in Japan, the ruling Liberal Democratic Party's coalition suffered its first major loss in the country's lower house in over a decade, leaving the future makeup of the legislative chamber hanging in the balance. We expect to gain further clarity on the configuration of the new government, and possibly its leadership, in the coming weeks.

• Given an environment of gradually improving economic growth, inflation that is expected to remain around target in the medium term, but some degree of political uncertainty, we see the BoJ proceeding with further rate hikes, albeit at a somewhat gradual pace. Against that backdrop, we remain comfortable with our forecast for the central bank to lift its policy rate by 25 bps at each of its January 2025 and April 2025 meetings, which would see the policy rate reach around 0.75%.

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