BoJ preview: Status quo in October to buy time to communicate with Takaichi’s new government

The Japanese Yen has rapidly depreciated to above USDJPY=150 since Takaichi was nominated as the President of the Liberal Democratic Party (LDP) on October 4th and the Prime Minister (PM) of Japan on October 21st (Chart 1). These developments reflect the financial market’s expectations that the Bank of Japan (BoJ) will keep the monetary policy accommodative, as Takaichi has fully supported a lax monetary policy which reminds investors of Abenomics*.Meanwhile, economic developments continue to support further policy normalization by the BoJ. On the Tankan survey, manufacturing business sentiment among large firms slightly improved to +14 in September from +13 in June (Chart 2). While the economy has held up well after the US tariffs were raised, the virtuous circle between nominal wages and inflation has been gradually strengthening. These developments would support a rate hike.However, the BoJ has kept a cautious stance in further normalizing the monetary policy, as the communication with the government complicates. In fact, Governor Ueda already said at a press conference in Osaka on October 3rd that the Tankan results don’t fully reveal the negative impacts from the US tariffs. The intention to remain cautious could be to discuss the monetary policy with the new PM before the BoJ hikes. In fact, the government can request the policy board to delay its policy decision.With this background, the important question is whether the BoJ can afford to buy time to communicate with the government. A weaker Yen would increase import prices and further reduce real wages which fell by -1.2% YoY in August. Fortunately, import prices have been recently stable falling -0.8% YoY in September.All in all, the BoJ is expected to remain on hold at the October meeting, keeping the door for a further rate hike opened. Governor Ueda could highlight that a weak Yen would raise inflation through higher import prices. This is likely to be acceptable to PM Takaichi, as elevated living cost is one of the important policy issues she needs to address.