Increased uncertainty in Japan and the US elections, the Bank of Japan is expected to stand still on Thursday

Tochu Finance APP learned that with the results of the Japanese House of Representatives election indicating uncertainty about the next government and the approaching US presidential election, the market currently generally expects the Bank of Japan to stand pat at its policy meeting on Thursday amid rising uncertainty. A survey of 53 economists suggests that the Bank of Japan is expected to keep its benchmark interest rate unchanged at 0.25% after the two-day policy meeting.

Prior to the Bank of Japan's policy meeting, the results of the House of Representatives election in Japan brought political uncertainty. It is reported that the tally results show that the ruling coalition of the Liberal Democratic Party and Komeito only won a total of 215 seats, falling short of the half of the 465 seats in the House of Representatives. This is also the first time since 2009 that the ruling coalition of the Liberal Democratic Party and Komeito has failed to secure a majority of seats. Some experts believe that the power struggle over forming a cabinet in the coming period will intensify, and Japan's political arena will enter an unstable phase, with a greater possibility of a "short-lived" prime minister or government.

The unstable political outlook may deprive the Bank of Japan of the political stability needed for a smooth interest rate hike, complicating the Bank of Japan's efforts to reduce reliance on monetary stimulus policies. Bank of Japan Governor Haruhiko Kuroda has more reason to choose to wait and see. Kuroda has previously stated that the Bank of Japan has sufficient time to consider the monetary policy path, implying that there will be no rate hike in this week's policy decision. He also expressed hope to focus on the outcome of the US election and its impact on the economy and financial markets.

Atsushi Takeda, Chief Economist at Tochu Research Institute, said: "The Bank of Japan's strategists 'do not act when uncertainty is high'. At present, they are unlikely to give a clear indication of a rate hike in December or January. They do not want to commit to anything right now."

Most Bank of Japan watchers expect another rate hike before January next year

One focus of the market is whether the Bank of Japan will signal the timing of the next rate hike on Thursday. About 87% of Bank of Japan watchers expect the central bank to take action before the end of January next year, with 53% of Bank of Japan watchers believing the bank will act in December.

Investors believe that the threshold for the Bank of Japan to raise interest rates will be higher in the current politically unstable situation. The yen fell to as low as 153.88 yen against the US dollar on Monday, its lowest level since July. This brings the yen exchange rate closer to the level at which the Japanese authorities last intervened to support the yen, and relevant departments have recently issued warnings about the yen's trend The weakening of the Japanese yen often triggers market speculation that the Bank of Japan will raise interest rates early to curb imported inflation. The overnight swap index fully reflects the expectation of a 25 basis point rate hike by the Bank of Japan before June next year.

Traders will closely monitor whether Governor Kuroda will further reiterate the Bank of Japan's current stance, that is, if inflation expectations materialize, the Bank of Japan will further raise interest rates. Another key issue is whether Governor Kuroda will continue to say that he has time to consider the next policy steps.

Charu Chanana, Chief Investment Strategist at Singapore's Shengbao Bank, said, "The key observation is whether Governor Kuroda hints at political instability risks. The risk of the Bank of Japan delaying rate hikes will only increase the pressure on the currency at a time when the yen is already under pressure from rising U.S. bond yields and U.S. election risks."

Economist Taro Kimura said, "The Bank of Japan is prepared to keep the benchmark interest rate unchanged at Thursday's meeting. Governor Kuroda stated in September that the Bank of Japan needs to assess the state of the U.S. economy before raising rates again. This will take more time."

In addition to the policy statement, the Bank of Japan will also release the latest quarterly economic forecasts for the three fiscal years ending in March 2027. Sources revealed earlier this month that Japanese authorities believe there is no need for any major changes as inflation is arriving in line with their forecasts.

Another aspect of the latest quarterly economic forecast worth noting is whether the Bank of Japan will continue to state that inflation risks for this fiscal year and the next fiscal year are on the rise. This was one of the driving factors behind the rate hike in July as claimed by Governor Kuroda.

Japan's main inflation indicators have remained at or above the Bank of Japan's 2% target for 30 consecutive months, and wage growth has accelerated to its highest level on record. Even the International Monetary Fund (IMF) has expressed more confidence in the sustainability of Japan's price growth. Atsushi Takeda said, "Japan's inflation and wage growth are as the Bank of Japan expected. The possibility of a rate hike in December has decreased due to political uncertainties, but it has not been ruled out yet."