Bank of Japan can afford to sit next week out – Commerzbank

The Bank of Japan is once again in an unenviable position. It would like to continue raising interest rates, which are still stuck at 0.25%, and would like to take advantage of rising inflation to finally move away from its long-standing zero interest rate policy. But the timing is always difficult to get right. When it raised rates in the summer, a very weak US employment report followed a few days later, which, together with the rate hike, triggered sharp swings in the JPY and the stock market. And next week's timing does not seem ideal either, Commerzbank’s FX analyst Volkmar Baur notes.

BoJ can confidently leave rates unchanged next week

“First of all, the Japanese themselves go to the polls on Sunday. After Prime Minister Ishiba Shigeru won an internal party election last month to take over the premiership from Kishida Fumio, he called a snap election to secure his mandate. According to opinion polls, however, this appears to have backfired. The current ruling coalition of the LDP and Komei is in danger of losing its parliamentary majority.”

“As a result, when the BoJ meets next Thursday, it may still be unclear what the government will look like in the coming years and what its fiscal plans are for the near future. In addition, less than a week after the BoJ meeting, another somewhat important election will take place in the US, which could also cause significant market volatility.”

“Perhaps the timing is not so bad after all. Given the political uncertainties, the BoJ can confidently leave rates unchanged next week. This will allow it to avoid any uncomfortable questions about what has happened to its plans for further rate hikes. And will give the BoJ another six weeks until its next meeting.”