Japan: BoJ likely to hold amid external uncertainty – Standard Chartered

BoJ likely to keep base rate unchanged amid easing inflation and mixed economic performance. Global economic and political uncertainty to keep BoJ cautious. We now expect BoJ to hike the base rate in Q1-2025 (vs Q4-2024 previously). Downside risk to USD-JPY could come from any unexpected tweaks to policy guidance. A sharp move in USD-JPY towards 160 may revive calls for BoJ to tighten sooner rather than later, Standard Chartered’s economists Chong Hoon Park and Nicholas Chia note.

BoJ in wait-and-see mode, for now

“We expect the Bank of Japan (BoJ) to keep the base rate unchanged at its 31 October meeting, on mixed economic data and global uncertainty. While the market expects a rate hike later this year or early next year, the BoJ will likely pause for now, allowing more time to assess the domestic and global economic landscape. We now see the BoJ hiking the base rate in Q1-2025 (vs December previously), followed by another hike in Q3-2025 (vs Q4-2025 previously), taking the base rate to 0.75% by end-2025; we estimate the neutral rate at around the 0.75% to 1% level.” 

“The BoJ is likely to refrain from making any immediate policy changes given mixed economic signals, both domestically and globally. While the domestic economic recovery is underpinned by solid consumer spending and rising wages, concerns about weaker exports and global uncertainty are weighing on Japan's outlook. The central bank appears set to prioritise stability, opting to wait for more clarity on global conditions, particularly in the US, before making any decisive moves. We expect the   BoJ to maintain its accommodative stance at the upcoming meeting, allowing the economy more room to absorb any external shocks and for wage growth to solidify inflationary trends further.”  

“Japan's ruling Liberal Democratic Party (LDP), led by Prime Minister Shigeru Ishiba, and its coalition partner Komeito failed to secure a majority in the House of Representatives election, for the first time since 2009. This shift poses further challenges for Ishiba, whose leadership and policy goals, including defence spending and regional growth, now face uncertain prospects. Moreover, the unfavourable election result from the perspective of the ruling coalition is likely to cloud the BoJ’s policy normalisation path moving forward. The LDP may need to resort to more populist measures, such as welfare spending or tax cuts, to stabilise its position.”