The BOJ may give little signal as fears of a US recession ease, rates hold By Reuters

Written by Leika Kihara

WASHINGTON (Reuters) – The Bank of Japan is expected to keep interest rates extremely low next week, and perhaps signal a more hawkish policy outlook due to easing fears of a US recession – and the need to prevent speculators from devaluing the yen too much. .

Since ending the decade-long stimulus program in March, the BOJ has signaled its intention to continue raising interest rates from low levels. But it was forced to tone down its hawkish message and promise to slow, or even stop, rate hikes after a July rate hike was blamed for fueling market violence.

While the BOJ appears to be in no rush to raise rates, any tilt back to a leaner scenario would underscore its desire to leave itself in the swing zone during the next move, analysts said.

It could also help prevent the yen, which has recently resumed its decline, from testing further declines and hurting already weak consumption by raising fuel and food import costs.

“As the yen falls again, the BOJ will likely try to avoid sending a message that could be seen as dovish,” said Ryutaro Kono, chief Japan economist at BNP Paribas (OTC: ).

At the two-day meeting ending October 31, the BOJ is widely expected to keep short-term interest rates steady at 0.25%.

In a quarterly report to be released after the meeting, the board also appears to be making no major changes to its forecast that inflation will hover around 2% in early 2027.

The latest domestic data largely supported the BOJ's view that rising wages and prospects for continued wage gains are boosting consumption, and encouraging more firms to raise prices not just for goods but also services.

A growing labor shortage is also raising hopes that companies will continue to raise wages next year, said three sources familiar with the BOJ's thinking.

“The Japanese economy is on the verge of recovery,” said one of the sources. “Prices will continue to rise as many companies have not fully passed the rising costs,” said another source.

The BOJ could highlight such progress made on wages and prices in a report, which would underline its confidence that the demand for more rate hikes is working.

STRIKING THE EQUIVALENCE OF THE RIGHT

Markets, however, will focus more on the BOJ's view on risks as Ueda highlighted volatile markets and fears of a US recession as key reasons for moving slowly on its rate hike path.

After meeting with his colleagues from major economies this week in Washington, Ueda offered a sobering view of the global economic outlook.

“Optimism about the US economic outlook appears to be growing slowly,” although more scrutiny was needed on whether it would last long, he said on Thursday.

The BOJ may also drop hints by tweaking part of the report on future policy guidance. In the latest report released in July, the BOJ said it will continue to raise rates if economic and price conditions move in line with its forecast.

The board will debate whether additional language about risks or policy changes should be included in the directive, the sources said.

The BOJ ended negative rates in March and raised short-term interest rates to 0.25% in July on the assumption that Japan was making progress toward achieving its 2% inflation target.

Ueda has repeatedly said that the BOJ will continue to raise rates if the economy moves in line with its forecast. But he also said that the bank was not in a hurry as inflation remained moderate.

A small majority of economists polled by Reuters expect it to stop hiking this year, although most expect one in March.

The IMF on Thursday welcomed the BOJ's July rate hike and called on the central bank to raise rates gradually.

But political uncertainty and a renewed weakening of the yen complicate the BOJ's communication. While it wants to tread carefully to avoid bullish markets, sounding too pessimistic can give speculators an excuse to sell it – a dilemma Ueda acknowledged in Washington.

“When there is a lot of uncertainty, you usually want to proceed cautiously and slowly. “But the problem here is if you proceed slowly and create expectations that prices will stay at low levels for too long, this can lead to a large accumulation of speculative positions that can be problematic,” Ueda told the panel of -IMF on Wednesday.

“We have to strike a balance.”