BOJ Is Said to See Little Cost to Waiting for Next Rate Hike

The Bank of Japan (BOJ) is facing a delicate balance between managing inflation and maintaining economic stability. As reported by Bloomberg, BOJ Governor Kazuo Ueda is considering a pause in rate hikes, acknowledging the need to monitor market moves after the Fed's expected pivot and assess the impact of its July hike. This strategic approach aligns with the BOJ's long-standing focus on ensuring macroeconomic stability, as highlighted in a Springer study. The BOJ's cautious stance is also influenced by the potential for political curveballs heading into the election, as discussed in an Asahi article. By pausing rate hikes, the BOJ can avoid market perceptions of abandoning its tightening bias and maintain flexibility in responding to economic uncertainties.



Political factors, like the upcoming election, may influence the BOJ's monetary policy strategy. The new Prime Minister, Shigeru Ishiba, has expressed reservations about further rate hikes, potentially delaying the BOJ's plans. However, the BOJ may use overseas risks, such as a slowing U.S. economy, as an argument for not raising rates straight away to avoid market perceptions of abandoning its tightening bias. The BOJ may also wait for political uncertainty to subside post-election before resuming rate hikes.

The Bank of Japan's (BOJ) communication strategy significantly impacts market expectations and volatility. In July 2024, BOJ Governor Kazuo Ueda sent hawkish signals about the outlook, spooking global investors and causing market volatility (Source 2). However, the BOJ's subsequent pause in rate hikes and clear communication of its intentions have helped stabilize markets (Source 4). The BOJ's messaging is crucial, as it influences investor sentiment and market reactions to policy changes.

Delaying a rate hike by the Bank of Japan (BOJ) could have potential economic consequences. According to a Bloomberg survey, all 53 economists expect the BOJ to keep rates unchanged this week, with almost 70% forecasting a hike by December. However, waiting could exacerbate inflation, which has been running more or less at the same level in the US and Europe this year. Hiroshi Yoshikawa, a prominent economics professor, warns that Japan's borrowing costs are too low, and the BOJ may face an economic downturn or crisis if it doesn't raise rates (Bloomberg, 2024). Additionally, delayed rate hikes could decrease business confidence, as seen in the market meltdown following the BOJ's July hike, which spooked investors and led to a rout in risk assets (Bloomberg, 2024).

In conclusion, the BOJ's decision to pause rate hikes is a strategic move to balance inflation management and economic stability. Political factors and communication strategy play a crucial role in shaping market expectations and volatility. While delaying a rate hike may have potential economic consequences, the BOJ's cautious approach allows it to maintain flexibility in responding to economic uncertainties and political curveballs.