Bank of Japan Hints at Rate Hike Amid Political Uncertainty

Japanese Prime Minister met with the Governor of the Bank of Japan to discuss economic and financial market conditions. The Governor stated that they exchanged general views on the economy, prices, and market conditions, similar to previous meetings. He also mentioned that if the economy and prices improve in line with the Bank of Japan's outlook, the central bank would consider raising interest rates. The meeting took place amid growing speculation about the Prime Minister's potential resignation, which has led to increased market volatility.

The Governor emphasized the importance of market stability and the need for close coordination between the government and the central bank. He also noted that the Bank of Japan would continue to monitor the foreign exchange market and maintain open communication with the government. The next policy decision by the Bank of Japan is expected in September.

This meeting marked the first time the two had met since February, indicating an effort to reassure market participants that the government and the central bank are closely coordinating their efforts, despite concerns about political instability. The Governor also discussed market developments, including currency markets, but did not provide specific details.

Earlier in the day, a key ally of the Prime Minister within the ruling party expressed a desire to resign, suggesting that if the Prime Minister approves, it could trigger a wave of resignations, potentially even affecting the Prime Minister. The Governor stated that he hopes the market will reflect fundamental changes and that he will monitor the foreign exchange market while maintaining communication with the government.

Economists are increasingly expecting the next rate hike to occur before the end of the year, following a trade agreement between Japan and the United States in late July. However, the Governor stated that he does not expect a rate hike this month, but that the Bank of Japan will have more data and information about the impact of U.S. tariffs by the time of the October meeting.