Bank of Japan's "wait-and-see" approach in October is almost certain! The key lies in how to adjust the "inflation outlook"

The Bank of Japan's interest rate meeting in October is approaching, with the market almost unanimously expecting a "stand pat" stance. The focus is on how the inflation forecast for the fiscal year 2024 will be adjusted and Governor Kuroda's statements on rate hikes and their influencing factors.

According to Bloomberg on Thursday, most economists surveyed by Bloomberg expect the Bank of Japan to keep its benchmark interest rate unchanged at the meeting next week (October 31), with the next rate hike expected in December or January.

Specifically, the survey shows that almost all 53 BOJ watchers predict that the Bank of Japan will maintain the interest rate. About 53% believe the Bank of Japan will hike rates in December, with the number expecting a rate hike in January jumping from 19% to 32%.

Since a "stand pat" stance is almost certain, the focus of this meeting is whether the Bank of Japan will adjust its inflation risk assessment from July, specifically whether the wording of "upward price risks for the fiscal year 2024 (ending March 2025)" will be removed. If this wording is removed, expectations for a December rate hike may weaken.

Another key point is Governor Kuroda's remarks at the press conference, with analysts expecting that he may not make any explicit comments while reiterating the Bank's stance to hike rates if inflation prospects materialize. Additionally, he may emphasize overseas economic trends, especially the ongoing uncertainty in the U.S. economic outlook.

Upward Price Risks for Fiscal Year 2024: To Remove or Not, That is the Question

One major focus for the October outlook report is whether the Bank of Japan will remove the upward price risks for the fiscal year 2024 (ending March 2025).

According to the Bloomberg survey, about 45% of economists believe the Bank will stick to this risk assessment, while 41% expect a change, and another 14% find it difficult to judge.

Based on the minutes of the July monetary policy meeting, the Bank of Japan decided to hike rates, with several committee members expressing the view that:

Given that the year-on-year growth rate of the Consumer Price Index (CPI) has exceeded 2% for more than two years, upward price risks will become a more important factor in the Bank's policy decisions.

The outlook report for April 2024 previously indicated that the price risks for the fiscal year 2024 tended to be upward but overall balanced. However, the warning in the July outlook report was stronger, stating:

Price risks for the fiscal years 2024 and 2025 tend to be upward.

Morgan Stanley pointed out in its latest report on October 23 that if the Bank of Japan removes the upward price risks for the fiscal year 2024 in the October outlook report, market expectations for a December rate hike may weaken.

In addition, in his speech on September 24, Governor Kuroda mentioned that when the rate hike took place in July, consideration was given to the rise in import prices due to the depreciation of the yen, which constituted upward price risks. However, he also noted that since August, the unilateral depreciation of the yen has eased, and the rise in import prices has also slowed down, with import prices in September falling by 2.6% year-on-year, the first decline in eight months. Nevertheless, the recent weakening of the yen exchange rate in the past few weeks, with the USD/JPY breaking the 150 level, may complicate the Bank of Japan's view on these fluctuations and their impact on prices Morgan Stanley believes that the Bank of Japan may maintain its view on the upward risks to prices for the fiscal years 2024 and 2025. Bank of Japan Executive Director Takeshi Kato stated on October 22 that in an environment of continuous depreciation of the yen, prices may be more significantly affected.

What to Watch for in Haruhiko Kuroda's Press Conference?

Another key point is the remarks of Bank of Japan Governor Haruhiko Kuroda at the press conference.

Morgan Stanley believes that Haruhiko Kuroda may express the following views:

1. Overseas economic trends, especially the trends in the U.S. economy, still have uncertainties, financial market trends remain unstable, while pointing out that the trends in personal consumption, wages, and prices broadly meet expectations.

2. Reiterate the existing view that if the potential inflation rate rises according to the Bank of Japan's outlook, it would be appropriate to raise the policy rate accordingly and adjust the degree of monetary easing.

3. Regarding the recent depreciation of the yen, we expect him to emphasize that as corporate behavior shifts more towards raising wages and prices, exchange rate movements may be more likely to impact prices than in the past.

4. Pay attention to any comments on the October Tokyo CPI data, as well as the latest assessments and outlook on service prices, such as the 2025 wage growth target of the largest labor union federation in Japan, the latest trends in wage growth, recent inflation expectations of companies and households, views on price cuts reported by some companies, and whether Kuroda will mention the data that the Bank of Japan will monitor before the December monetary policy meeting.

However, some analysts point out that the likelihood of Kuroda clearly signaling a rate hike in December is low. Naoya Hasegawa, Chief Bond Strategist at Okasan Securities, stated:

With the U.S. presidential election approaching, the likelihood of the Bank of Japan sending a strong signal for a rate hike in December is low. The Bank of Japan may emphasize closely monitoring the U.S. economy and Japanese inflation and wages, and if expectations are met, maintain its stance on a rate hike.

In addition, Morgan Stanley stated that if the ruling Liberal Democratic Party and Komeito lose a significant number of seats in the House of Representatives election on October 27, leading to increased stock market volatility, the likelihood of a rate hike in December would decrease.