BoJ preview: Groping through high global uncertainty deserves cautious approach to hike

The Bank of Japan (BoJ) is increasingly facing a dilemma to further normalize its monetary policy.On positive developments, the virtuous cycle between nominal wages and inflation continued to strengthen. After the strong FY25 spring wage negotiation, nominal regular wages rose by +2.5% YoY in July (Chart 1). This comes on top of the +2.4% YoY growth in the previous year, the largest increase in three decades. Furthermore, services CPI inflation gradually picked up to +1.5% YoY in July. As inflation expectations have also stabilized above 2%, domestic inflation pressure has been strengthening, setting the stage of further rate hikes.At the same time, speculative long position on the Yen has been declining, which could have been behind the weakness in the Japanese currency since May (Chart 2). With this background, a rate hike could strengthen the Yen, alleviating the cost push inflation which has been behind declining real wages (Chart 1).However, a stronger Yen could reverse the virtuous cycle, posing challenges to the BoJ to further normalize. In fact, manufacturer’s current profits already dropped by -11.5% YoY in Q2-25, as they lowered their prices to stabilize exports to the US with higher tariffs. Hence, a Yen appreciation would inevitably further squeeze their profitability, weaking the prospects of the FY26 spring wage negotiation.With these developments, the BoJ Deputy Governor Himino highlighted the high uncertainties on the global economy at a press conference in Kushiro on September 2nd. He said, “the risk of a larger-than-expected impact may deserve greater attention.” His comments suggest that the BoJ is not in a rush to hike. In fact, the Bank can assess the impact of US tariffs with the Tankan survey and qualitative results from interviews at the branch managers’ meeting on October 6th.On top this, political uncertainties complicate the BoJ’s policy decision. After Prime Minister Ishiba’s resignation, a new President against monetary policy tightening such as Takaichi could be elected at the Liberal Democratic Party (LDP)’s election on October 4th.All in all, the BoJ is expected to decide a status quo with the policy rate at 0.5% at the monetary policy meeting on September 19th to assess the economic impact of the US tariff.