The Bank of Japan (BoJ) has once again decided to keep its benchmark interest rate unchanged, clinging to the path toward its inflation target. This journey now comes with a hint of intrigue—could a rate hike be around the corner?

Governor Kazuo Ueda definitely believes the political climate in Japan will not prevent the BoJ from raising rates if inflation and economic growth meet their expectations. In his words: “If our economic and price forecasts come to pass, we’ll respond by raising rates.” It’s hardly reassuring for those expecting a steady hand. Ueda also declared it’s no longer necessary to “take time” before adjusting policy now that risks around the U.S. economy have apparently dissipated.
Naturally, the yen leapt on this hint of hawkishness, with investors interpreting his words as a sign that a rate hike could be closer than anticipated.

Ueda and his board decided to keep the uncollateralised overnight call rate at approximately 0.25%, just as economists expected. And why wouldn’t they? In a shaky political landscape, with the ruling Liberal Democratic Party suffering its worst election result in 15 years, the case for cautious monetary policy seems obvious.
Japan’s Prime Minister, Shigeru Ishiba, may even find himself balancing economic stimulus with fiscal restraint if he needs to broker deals to secure a coalition. In that scenario, pressure on the BoJ to avoid further rate hikes could rise.

Instability alone won’t keep the BoJ from a rate hike. In its quarterly report, the BoJ noted that it must monitor foreign economies, especially the U.S., even though the “fog is starting to lift.” Ueda hinted at potential risks from the new U.S. president’s policies because nothing says clarity like a vague “watch and see” approach to international volatility.
Market data now suggests a 69% chance of a rate move by January, up from 63% on Wednesday.