Will Takaichi’s first moves as a PM pave the way for a BoJ rate hike in December? | FXStreet
The Bank of Japan (BoJ) meets on Thursday and is expected to keep its benchmark interest rate unchanged at 0.5%, awaiting the first moves of Prime Minister Sanae Takaichi’s new cabinet.
Market hopes that the BoJ will continue normalising its monetary policy remain intact, and some central bank policymakers have confirmed that theory. Expectations of an interest rate hike in October, nevertheless, have receded, following the election of the fiscal dove Takaichi as Japan’s Prime Minister in mid-October.
In this context, investors will keep their focus on the vote split, expecting to see some dissenting voices, and on the tone of BoJ Governor Kazuo Ueda’s press conference, seeking validation of a rate hike in December or, at the latest, in January.
What to expect from the BoJ interest rate decision?
As it stands, the BoJ is expected to maintain its monetary policy unchanged for the sixth consecutive meeting in October and reiterate its commitment to gradual monetary tightening.
A recent Reuters poll showed that 60% of analysts expect the Bank of Japan to raise its benchmark interest rate to 0.75% from the current 0.5% before the year-end. Data from the overnight swaps market, however, revealed that the chances of an October hike have dropped to about 24%, from 68% last month.
The new Prime Minister Takaichi, an assistant of former Prime Minister Shinzo Abe, has defended a looser fiscal policy and pledged to reassert the government’s authority over the Bank of Japan and its monetary policy. This has raised concerns about the central bank’s independence, dampening market expectations of immediate rate hikes.
With this in mind, the stubbornly strong inflation is likely to pose a serious challenge to Takaichi’s aim of an expansive monetary policy. Data released last week revealed that the National Consumer Price Index (CPI) accelerated to 2.9% in September, from the previous 2.7%, remaining above the central bank’s target for price stability.
Beyond that, service-sector inflation has picked up for the second consecutive time in September, endorsing the BoJ’s view that rising labour costs will keep price pressures sustainably above the central bank’s 2.0% target in the coming months.
Against this background, some BoJ policymakers have called for immediate rate hikes. Board Member Hajime Takata said last week that now is the appropriate time to raise interest rates, noting that inflation has remained above the bank’s target for three and a half years already, and the economic risks stemming from US tariffs have eased. BoJ Governor Ueda, however, has been showing a more cautious view.
How could the Bank of Japan’s monetary policy decision affect USD/JPY?
In this context, investors have already assumed a delay of the next rate hike, but they are likely to look for confirmation that the plan to keep normalising the monetary policy remains in play. A dovish hold, with no mention of upcoming rate hikes, might disappoint markets and send the Japanese Yen (JPY) on a tailspin.
The Yen lost more than 2% against the US Dollar (USD) in the week after Takaichi secured support to form a cabinet in mid-October. This week, USD/JPY has whipsawed, pulling back following the agreement between the US and Japan, and higher hopes of a China-US trade deal, to bounce up again following Chairman Jerome Powell’s hawkish comments after the Fed’s monetary policy decision on Wednesday.
USD/JPY 4-Hour Chart
From a technical perspective, Guillermo Alcalá, FX analyst at FXStreet sees the USD/JPY pair looking for direction with key resistance below the 153.20 area: “The risk is on a too dovish BoJ statement, which might disappoint investors and send the pair back beyond the eight-month highs, at the 153.25 area, aiming for mid-February highs, at 154.80.”
“On the other hand, clear signals hinting at a rate cut in December or a high number of dissenters would give fresh hopes for Yen bulls to retest the October 21 and 22 lows, at the 151.50 area,” says Alcala.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
Economic Indicator
BoJ Interest Rate Decision
The Bank of Japan (BoJ) announces its interest rate decision after each of the Bank’s eight scheduled annual meetings. Generally, if the BoJ is hawkish about the inflationary outlook of the economy and raises interest rates it is bullish for the Japanese Yen (JPY). Likewise, if the BoJ has a dovish view on the Japanese economy and keeps interest rates unchanged, or cuts them, it is usually bearish for JPY.
Next release:
Thu Oct 30, 2025 03:00
Frequency:
Irregular
Consensus:
0.5%
Previous:
0.5%
Source:
Bank of Japan