BOJ to Hold Rates Steady Amid Market Turbulence Watchful of Fed’s Next Move

Bank of Japan (BOJ) officials reportedly see little need to raise the benchmark rate at their meeting next week, focusing instead on lingering financial market fluctuations and the effects of their July rate hike, according to informed sources.

Sources indicate that the BOJ is likely to keep rates unchanged at 0.25% at the conclusion of their two-day policy meeting on September 20. Given the recent market turmoil, including the Nikkei 225's record drop on August 5 just days after the BOJ's last rate increase, the central bank is closely monitoring financial markets.

Most economists surveyed following August's market volatility expect the BOJ to hold off on further rate hikes until December or even early next year.

Officials maintain that, despite current market instability, the BOJ should proceed with rate hikes if the economic and inflation outlook aligns with their expectations. Recent market disruptions have not significantly altered the central bank's views articulated in the quarterly outlook report from July. Depending on economic and financial conditions, officials do not rule out another hike later this year or in early 2025.

Deputy Governor Shinichi Uchida stated last month that the BOJ would not raise rates during periods of financial market instability. Another deputy, Noriyuki Himino, emphasized the primary task of vigilantly monitoring the market.

The potential underperformance of the U.S. economy is also a factor of concern, suggesting that the BOJ should not rush into the next rate hike. With Japan facing a leadership change, BOJ officials are also keeping a close eye on the domestic political landscape. The ruling Liberal Democratic Party is expected to decide on the new prime minister during its leadership election on September 27. BOJ officials predict that the new leader will not push for significant changes in monetary policy, as the ruling party supports the central bank's stable inflation goals.

In the interim, BOJ officials continue to assess the impact of each rate hike to ensure that future adjustments are appropriate. Market participants hold the view that the BOJ's perspective on the nominal neutral rate, approximately 1%, remains uncontroversial, as suggested by recent BOJ papers.

The BOJ meeting will commence just hours after the Federal Reserve's decision, with widespread expectations that the Fed will cut rates, joining the European Central Bank in adopting a more accommodative monetary policy stance. Should the U.S. cut rates, it would narrow the interest rate differential between the two countries and provide support for the yen. BOJ officials will closely monitor immediate market reactions to the Fed's decision and observe whether this stabilization has a lasting impact.