The latest statement from the Bank of Japan signals a rate hike.
On October 16th, Masatoshi Anda, a member of the review committee of the Bank of Japan, stated in his speech that the conditions for Japan to enter policy normalization are already met, and it is appropriate for the Bank of Japan to adopt a gradual interest rate hike approach.
Regarding the timing of the Bank of Japan raising interest rates again, which the market is highly concerned about, Masatoshi Anda said that there is currently no specific month to consider, but it is necessary to avoid pushing Japan back into a deflationary state due to premature interest rate hikes.
At the market level, the Japanese stock market suffered a heavy decline today. As of the close, the Nikkei 225 index fell more than 730 points, a drop of 1.83%, to 39180.3 points; The Japan Eastern Stock Exchange index fell 1.2%, led by the semiconductor sector, and Tokyo Electronics fell more than 9%.
It is worth noting that Barclays' latest report warns that the market may underestimate the probability of the Bank of Japan raising interest rates. Barclays predicts that the Bank of Japan will raise interest rates by 25 basis points in December this year or January next year.
Bank of Japan issues statement
On October 16th, Masatoshi Anda, a member of the review committee of the Bank of Japan, stated in his speech that at the March meeting this year, the Bank of Japan decided to cancel the negative interest rate policy and yield curve control (YCC), and use short-term interest rate operations as the main policy tool. In addition, at the July meeting, the Bank of Japan raised interest rates and gradually reduced the purchase of long-term treasury bond. Through these measures, the Bank of Japan is striving to achieve its 2% "price stability target" and promote policy normalization.
Anda Chengsi pointed out that the conditions for Japan to enter policy normalization are already met. These conditions include: firstly, the year-on-year distribution of CPI prices in various categories no longer exhibits the characteristics of a deflationary period; Secondly, the CPI level has exceeded its peak before the deflation period. However, in the process of moving towards normalization, it is also necessary to avoid any drastic policy changes that may plunge market expectations into deflation again.
Therefore, Anda Chengsi believes that it is appropriate for the Bank of Japan to adopt a gradual interest rate hike approach.
Anda Chengsi stated that if the increase in underlying inflation is more driven by the rise in service prices, it will reduce the Bank of Japan's attention to the potential impact of the Federal Reserve's interest rate cuts. The rapid interest rate cut by the Federal Reserve does not necessarily mean that the Bank of Japan cannot raise interest rates. The Bank of Japan has not set a fixed pace for interest rate hikes and must pay special attention to data related to the real economy.
Regarding when the Bank of Japan will raise interest rates again, Masatoshi Anda stated that there are currently no specific months to consider. The previous interest rate hike measures have had the expected effect, but it is necessary to avoid pushing Japan back into a deflationary state due to premature interest rate hikes.
Anda Chengsi stated that the regional branch manager meeting to be held by the Bank of Japan in January next year may provide clues about next year's salary prospects, which is one of the factors determining policy.
Potential interest rate hike risk
The current consensus expectation in the market is that the Bank of Japan will abandon further interest rate hikes before the end of the year.
A survey shows that nearly 90% of economists expect the Bank of Japan to raise interest rates by the end of March next year. The released survey results highlight the challenges faced by the Bank of Japan in promoting policy normalization. Currently, most central banks around the world tend to cut interest rates, and there is uncertainty in the new political leadership's preference for monetary policy.
Mari Iwashita, chief market economist of Daiwa Securities, said that by the time the Bank of Japan releases its quarterly outlook report in January next year, the conditions for raising interest rates will be met. If the Bank of Japan wants to see the feasibility of the new US government policies and the situation of spring salary negotiations, it may postpone the decision until March.
But Barclays' latest report warns that the market may underestimate the probability of the Bank of Japan raising interest rates.
Shinichiro Kadota, an analyst at Barclays Bank's Japan Foreign Exchange and Interest Rate Research Department, and his team have released a report stating that the results of the Japanese House of Representatives elections in late October will affect the Bank of Japan's decision to raise interest rates. Specifically:
If the Liberal Democratic Party Komeito alliance wins a majority of seats in the parliament in the election, Shigeru Ishiba's "dovish" rhetoric may decrease, and market expectations for the Bank of Japan to raise interest rates will also increase;
If the Liberal Democratic Komeito coalition loses its majority, Shigeru Ishiba's dovish rhetoric may continue into the upper house elections in July 2025 and continue to suppress market pricing for the Bank of Japan's interest rate hike;
In the unlikely event that the Constitutional Democratic Party of Japan takes over the government, their policy recommendation is to lower the inflation target to "above 0%", which could lead to a significant interest rate hike by the Bank of Japan and a strengthening of the yen.
Barclays expects that the speed and magnitude of the Bank of Japan's interest rate hike will exceed the current overnight index swap (OIS) pricing. The Bank of Japan will raise interest rates by 25 basis points in December this year or January next year, and then raise interest rates by another 25 basis points in July to raise rates to 0.75%.