BOJ's Rate Hike Plans Face Headwinds from Yen Rebound and New Government's Policy Stance

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BOJ's Rate Hike Plans Face Headwinds from Yen Rebound and New Government's Policy Stance

BOJ's Rate Hike Plans Face Challenges

The Bank of Japan's (BOJ) efforts to raise interest rates are facing new challenges. A rebound in the yen and the new government's preference for loose monetary policy have raised the hurdle for further hikes.

Prime Minister Shigeru Ishiba's recent remarks suggesting the economy is not ready for further rate increases have surprised markets and cast doubt on the BOJ's aggressiveness. While political pressure is unlikely to derail the long-term case for rate hikes, analysts predict bumpy policy deliberations in the lead-up to the October 27 general election.

The BOJ is likely to hold off on raising rates at its October 30-31 meeting due to the upcoming election. However, pressure for immediate rate hikes had already eased before Ishiba took office due to a rebound in the yen.

Anticipating political uncertainty, the BOJ has signaled a pause in rate hikes. After keeping rates steady last month, Governor Ueda indicated that the BOJ is in no rush to hike with markets still unstable and U.S. economic uncertainties heightening.

With inflation exceeding 2% and a tight labor market pushing up wages, pausing for too long could cause communication problems. However, the BOJ may use overseas risks as an argument for not raising rates straight away, avoiding market perceptions of abandoning its tightening bias altogether.

There is uncertainty on whether Ishiba would revert to his previous support for a BOJ exit after the election. His approval ratings suggest a tough battle, and a significant loss of seats could weaken his standing and keep him under pressure to heed calls for loose fiscal and monetary policy.

Political uncertainty may continue until the upper house election next summer. If Ishiba wins solidly this month and the political situation stabilizes, the BOJ could raise rates in December or January. However, if the political turmoil drags on, it could unravel the BOJ's strategy to hike rates up to around 0.75% next year.