Kazuo Ueda signals Bank of Japan's caution on interest rates

Bank of Japan Governor Kazuo Ueda reaffirmed the central bank's cautious stance on interest rate policy during its annual conference in Osaka. While no clear declarations were made regarding a potential rate hike, Ueda emphasized that the BoJ may decide to do so if the baseline scenario, which assumes improving economic conditions and rising inflation, materializes..

In his statement, Ueda highlighted important global factors influencing the bank's decisions, including the state of the US economy, the impact of US tariffs on the profitability of Japanese companies, inflation trends, particularly in the food sector, and wage growth. He also noted that the potential lack of official data from the US, due to the ongoing budgetary paralysis there, could complicate the assessment of the situation and influence the pace of further action by the BoJ.

After Ueda's speech, the Japanese yen weakened by 0,4% and USD/JPY pair reached 147,82. The market perceived the tone of the statement as neutral, although some investors were counting on a more hawkish message that could reinforce expectations for a quick tightening of monetary policy.

Likelihood of a rate hike

Against the backdrop of official comments, it is worth noting that during the September meeting, two members of the BoJ board supported an interest rate hike. This is the first such case since Ueda took office, which may signal growing internal pressure to change the monetary policy courseAdditionally, the Osaka conference coincided with the publication of a positive Tankan report, indicating improved sentiment among Japanese entrepreneurs.

The market has increased the probability of a rate hike at the next meeting. BoJ, scheduled for October 30th – from 22% a month earlier to 56% currently. However, the situation is complicated by political uncertainty within the country. Elections for the leader of the ruling Liberal Democratic Party will be held on Saturday, and one of the candidates, Sanae Takaichi, has clearly expressed her opposition to raising borrowing costs, which could impact the Bank of Japan's future decisions.

Source: Krzysztof Kamiński, OANDA TMS Brokers