BOJ Rate Hike in October? Examining the Possibilities and Challenges

BOJ Rate Hike in October? Examining the Possibilities and Challenges

Former Bank of Japan (BOJ) board member Seiji Adachi stated in a Reuters interview that the central bank is likely to revise its economic and inflation forecasts upwards in its next quarterly assessment, potentially paving the way for an interest rate hike in October.

The market generally believes there is an approximately 50% chance that the BOJ will raise interest rates at its next policy meeting, scheduled for October 29-30. The central bank will also release new quarterly economic growth and inflation forecasts at that time. However, rate hikes are intended to control inflation, not as an investment recommendation.

BOJ Governor Kazuo Ueda previously emphasized the need to carefully assess the expected impact of US tariffs on the Japanese economy and wage outlook when deciding when to resume raising interest rates. Adachi said on Wednesday that, based on this risk-oriented approach, the BOJ may postpone raising interest rates until around March next year, when it will be clearer whether the shock from tariffs will affect wage negotiations next year.

However, he also pointed out that the possibility of the BOJ raising interest rates at its next meeting in October cannot be ruled out, as stronger-than-expected economic growth in the second quarter could push up the BOJ's growth forecasts and keep inflation near its 2% target.

Adachi said in the interview: "Another 25 basis point rate hike would do little damage to economic growth, as borrowing costs would still be below the level considered neutral for the economy.""

Adachi served on the BOJ's nine-member board until March of this year. He said that if the BOJ focuses more on the downside risks to the outlook, it may not raise interest rates in October, as recent data shows some weakness in exports and corporate profits.

He added: "But if the BOJ revises up its growth forecasts and amends its current forecast of inflation temporarily falling below 2%, then the BOJ has no reason to stand still.""

Last week, the BOJ kept interest rates steady at 0.5%, but two board members dissented, proposing a rate hike to 0.75%. The move pushed Japanese government bond yields higher, and the market consequently expects the BOJ to raise interest rates in the near future. In the current report issued in July, the BOJ expects the economy to grow by 0.6% in the current fiscal year (starting in April) and by 0.7% in fiscal year 2026. The bank expects core consumer inflation to reach 2.7% in 2025, then slow to 1.8% in 2026.

The BOJ will review these forecasts at its meeting on October 29-30 and assess various information, including the latest data showing that Japan's annualized economic growth in the second quarter reached 2.2% (higher than initial estimates), mainly due to robust consumption. Adachi said that the BOJ's quarterly "Tankan" business survey, to be released on October 1, could also influence the bank's decision on whether to raise interest rates next month.

He pointed out that Japan's underlying inflation rate is currently estimated at around 1.7%, and if the Tankan survey shows that companies' five-year inflation expectations accelerate from 2.3% in the last survey to 2.5%, the underlying inflation rate may reach the BOJ's 2% target. Kazuo Ueda has said that if the BOJ is more confident that underlying inflation will persistently reach its 2% target, it will continue to raise interest rates gradually. At a press conference last week, he said that underlying inflation has not yet reached 2%.

Adachi said: "The BOJ does not need to rush to raise interest rates, as the risk of inflation overshooting is not high. In a sense, it has discretion on the timing of interest rate hikes."

A Reuters poll conducted before the BOJ meeting last week showed that most economists expect the BOJ to raise interest rates again by 25 basis points before the end of the year. But respondents were divided on the timing of the rate hike, generally believing it would be in October or January of next year.