The Japanese central bank signals further interest rate hikes despite political uncertainties.

The Bank of Japan kept its short-term interest rate target at "around" 0.25 percent on Thursday, but indicated that further rate hikes might be on the horizon due to rising prices. This decision by the monetary policy department was expected by most economists. Some analysts now project another rate increase as soon as the next monetary policy meeting in December. The BoJ had already raised rates to 0.25 percent in July, following the end of the negative interest rate era in March. Given an unusually high level of political uncertainty in Japan, where the ruling Liberal Democratic Party lost its parliamentary majority in a surprise election, the central bank nevertheless decided to keep the rates at the current level. Voters, suffering from rising prices and stagnant wage growth, used the elections to penalize the LDP, which now struggles to form a parliamentary bloc large enough to remain in power. Analysts suspect that the uncertainty caused by the election results makes the BoJ's efforts to normalize monetary policy more difficult, but not impossible. The continuation of Japan's new Prime Minister Shigeru Ishiba is also in question. The accompanying personnel changes could increase the likelihood of abrupt political course changes. In its quarterly outlook, the BoJ predicted inflation around the 2 percent target. It expects inflation to decrease from the current 2.5 percent to 1.9 percent in the fiscal year 2025. The yen's weakness, having fallen from ¥143.7 at the beginning of October to about ¥153 per dollar, further suggested that it would be difficult for BoJ Governor Kazuo Ueda to adopt a cautious stance. Benjamin Shatil, senior Japan economist at JP Morgan, stated that the BoJ forecast, indicating that core inflation – excluding fresh food prices – would remain aligned with the target, was significant. Marcel Thieliant from Capital Economics pointed to the BoJ's projection that service prices might rise moderately, reflecting rising wages. This formulation reflects growing confidence that inflation is increasingly driven by domestic factors. Although the BoJ's statement is generally seen as hawkish, the central bank emphasized both domestic and external economic risks. The need to "pay close attention to future developments in overseas economies, particularly the US economy, as well as developments in financial and capital markets," was highlighted. Stefan Angrick from Moody's Analytics said that the central bank's growth and inflation forecasts suggested that rate hikes were still being considered. "The only question is the timing," Angrick said. "With the yen weakening, we expect another rate hike before the end of the year. The outcomes of the spring wage negotiations in 2025 will be crucial for policy decisions next year.