UBS expects that the likelihood of the Bank of Japan raising interest rates next week is low

UBS Global Research Chief Economist for Japan, Masamichi Adachi, expects that the likelihood of the Bank of Japan announcing an interest rate hike at next week's monetary policy meeting on October 30 is low, primarily due to the new tariff policies introduced by the United States, which have once again escalated the Sino-U.S. trade situation, along with the U.S. government shutdown and market concerns about the credit environment, all of which have increased uncertainty regarding the U.S. economic outlook.

He pointed out that most members of the Bank of Japan's committee currently believe that the risks of Japan's inflation level being too high are limited, considering that the current inflation rate close to 3% is mainly driven by rising food prices, while there are no signs of acceleration in service sector inflation. He also reminded that market predictions for a rate hike in Japan next week are only about 20%, meaning an unexpected rate hike could trigger market volatility, similar to the situation after the rate hike at the end of July last year, which led to declines in the U.S. dollar and Japanese stock markets in August last year. He believes the Bank of Japan does not welcome such situations to occur again.

Japan's new Prime Minister, Sanae Takaichi, holds a dovish stance on monetary policy, preferring a "high-pressure economy," but Masamichi Adachi believes she will not consistently oppose the Bank of Japan's rate hikes. He anticipates that discussions about rate hikes in the coming months are reasonable, currently holding a cautious view on a rate hike in December this year, expecting a rate hike in January next year, maintaining the forecast that the Bank of Japan will raise rates by 25 basis points every six months, with the terminal rates expected to rise to 1% in July next year and 1.25% in January 2027, reaching 1.5% by July 2027