Ignoring the remarks of the doves led by Governor Kuroda, the market is once again focusing on the prospect of the Bank of Japan raising interest rates

Zhitong Finance APP learned that as the Japanese economy improves and concerns about a US economic downturn fade, the market is beginning to refocus on the possibility of the Bank of Japan raising interest rates in December or January next year, despite the complexity brought by the change of government in Japan.

After the new Prime Minister Fumio Kishida opposed further rate hikes, recent remarks by Bank of Japan Governor Haruhiko Kuroda have clearly shifted towards dovishness, casting doubt on the timing of the Bank of Japan's next policy tightening.

Although there has been a change in policy sentiment recently, sources and analysts believe that the improvement in economic data provides the Bank of Japan with more reasons to further raise interest rates.

Three sources said that while the Bank of Japan is expected to keep rates unchanged at the meeting on October 30-31, it will roughly maintain its inflation rate forecast, keeping it near the 2% target level by March 2027.

Nobuyasu Atago, a former Bank of Japan official and current chief economist at Rakuten Securities Economic Research Institute, said that the Bank of Japan is unlikely to wait until March next year to raise rates.

Atago said, "Recent developments surrounding the US economy, including the fading risks of a severe recession, will favor further rate hikes by the Bank of Japan. From this perspective, the likelihood of a rate hike in the near term is increasing."

"I don't think the Kishida government will prevent the Bank of Japan from raising rates."

Kuroda has stated that with the gradual easing of inflationary pressures brought by import costs, the Bank of Japan has "sufficient time" to carefully study risks such as market instability and US economic uncertainty to determine the timing of the next rate hike.

However, sources said that this does not necessarily mean that the Bank of Japan will remain idle in the long term, especially when the conditions for rate hikes are ripe.

Sources said that many Bank of Japan policymakers believe the economy will moderately recover, wage increases will support consumption, and help maintain broad-based price increases, meeting the prerequisites for further rate hikes.

One source said, "The Bank of Japan is indeed not in a hurry," as there are hardly any signs of rising inflation. "But that doesn't mean it will unnecessarily delay the next rate hike."

Another source said, "The Bank of Japan may be trying to leave itself some room for maneuver to determine when to change its policy."

The Bank of Japan ended negative interest rates in March and raised short-term borrowing rates to 0.25% in July, marking the end of a decade-long era of aggressive monetary stimulus policies.

The Bank of Japan paused rate hikes in September

No reason to pause rate hikes

The uncertainty in Fumio Kishida's monetary policy stance, as well as the risk that a new round of rate cuts by the Federal Reserve could trigger market volatility again, have increased the challenge for the Bank of Japan to raise rates again However, from a macroeconomic perspective, the Bank of Japan has no reason to pause interest rate hikes.

In August this year, Japan's basic wages grew at the fastest pace in nearly 32 years, reflecting significant pay raises driven by spring labor negotiations.

A report from the Bank of Japan shows that the prospect of continued wage growth is increasingly clear, prompting more service sector companies to raise prices, thereby increasing the likelihood of widespread inflation.

Despite concerns about slowing overseas demand casting a shadow on the outlook, adverse factors have not yet affected the manufacturing sector. The Bank of Japan's quarterly survey shows that business confidence remains strong, with companies maintaining robust spending plans.

Even external risks highlighted in recent dovish comments by Governor Haruhiko Kuroda, such as the outlook for the U.S. economy and market volatility, appear to be diminishing.

The market has also regained some calm, with the Nikkei index recovering most of its losses from August. The exchange rate of the Japanese yen against the U.S. dollar has stabilized around 149 yen to 1 dollar, moving away from the near 30-year low of nearly 162 touched in early July.

The Bank of Japan will release its quarterly outlook report after the meeting on October 30-31. Sources say the key will be whether the report mentions market and overseas economic risks in the section on future policy guidance.

Following the October meeting, the Bank of Japan will hold policy meetings on December 18-19 and January 23-24 next year.

In addition, the results of the parliamentary elections in Japan on October 27 will also be crucial for the timing of the next interest rate hike.

Japan's newly appointed Economy Minister, Taro Aso, voiced support on Tuesday for the Bank of Japan's interest rate decision, refuting claims that the new Japanese government would hinder monetary policy normalization.

Some analysts suggest that if Fumio Kishida, previously seen as a monetary policy hawk, secures a strong victory in the parliamentary elections, solidifying his position within the ruling party, the probability of Japan raising interest rates in December or January next year may increase.

A third source stated, "To some extent, uncertainty always exists. From now on, the timing of (raising rates) will basically depend on judgment."