Expectations of BOJ interest rate hike at October policy meeting grow

The Bank of Japan (BOJ) is increasingly expected to raise its key interest rate at the October policy board meeting, as speculation intensifies on the back of fresh remarks from a former board member and stronger-than-anticipated economic data.

Makoto Sakurai, a former BOJ policy board member, said this week that an October hike cannot be ruled out. He flagged the likely upward revision to Japan’s inflation and growth forecasts. His comments were the latest to suggest that the central bank would move sooner rather than later.

Money markets now indicate a 50% chance of an interest rate cut on October 29-30. This is a significantly stronger signal than earlier this month, when bets on an imminent hike were much lower.

A Reuters poll of economists echoed this outlook, with over 93% forecasting a hike of at least 25 basis points by year-end, which would lift the BOJ’s policy rate from 0.5% to 0.75%. In August, Hironori Kamezawa, CEO of Mitsubishi UFJ Financial Group, also noted that October was a plausible timeline, citing sticky inflation and easing global trade tensions.

For years, the BOJ stood apart as the only major central bank clinging to ultra-loose monetary policy. But with inflation surpassing its 2% target for more than three years, pressure is mounting to normalize policy finally.

Internal hawkish momentum builds

The BOJ’s most recent meeting on September 19 reinforced this pivot. The board voted to maintain rates at 0.5%. However, two board members, Naoki Tamura and Hajime Takata, dissented for the first time since Governor Kazuo Ueda took office. Instead, they voted for an increase to 0.75%.

Analysts said the votes against were symbolic, indicating that hawkish sentiment is gaining sway inside the nine-member board. One alliance board member, Makoto Sakurai, said the dissent might be a coordinated signal of an approaching policy shift.

The bank said it would also take steps to shrink its holdings of exchange-traded funds (ETFs) and real-estate investment trusts (REITs). That was the first step in unwinding more than half a decade of asset purchases that had characterized an era of aggressive monetary easing.

Minutes of meetings released this week add to the picture. Some argued that the federal funds rate was below what would be expected to be neutral when inflation is high and the output gap is closing. That viewpoint indicates that even more members are preparing for action.

Sakurai, who left the BOJ in 2021, said policymakers could postpone a move until December if they need clearer readings of the effect of U.S. tariffs. But he thinks that the overall trajectory points higher. He sees the policy rate rising as many as 100 basis points over the next two and a half years, reaching 1.5% before Ueda’s term expires in 2028.

LDP election could shape BOJ’s timing

Government leadership could also factor into the timing. Japan’s ruling Liberal Democratic Party (LDP) will hold its leadership election on October 4. The result could determine the mood for BOJ decisions.

One of the leading candidates, Sanae Takaichi, has been considered a supporter of easy-money policy. Last September, during a leadership contest she ultimately won, she said that a rate rise would be “absurd.” But her tone has tipped this year. She has said that the monetary tools should be left to the BOJ, while the government sets fiscal and economic direction.

Should Takaichi, or any other dovish contender, take the top job, it is possible that the BOJ will move cautiously in the near term. Market watchers say the bank could postpone a hike to avoid looking at cross purposes with the incoming leadership.

Yet the BOJ is nominally independent. Its decision will be based on inflation, wage growth, and the wider outlook for trade and consumption.

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