We expect BOJ policy rate to remain unchanged in the 30th Oct meeting. It will be interesting to see whether other Policy Board members besides Naoki Tamura and Hajime Takata support a rate hike. In the outlook report, we expect upward revisions to both FY25 GDP growth and inflation forecasts, but any such revisions will reflect better-than-expected earnings and yen depreciation, and probably not point to any changes in the BOJ's outlook for the economy or inflation. Expectations for a rate hike in October have receded, in part due to the Takaichi trade. We look for coordination between the new government and the BOJ resulting into a Dec hike by BOJ. We believe that economic indicators released since the previous MPM in September generally justified an October rate hike. In particular, the Tankan survey for September showed an improvement in the business conditions diffusion index (DI) for large manufacturing companies which are relatively strongly affected by tariffs. But the surprise win of Takaichi in local LDP elections meant that Oct hike is now improbable. Takaichi’s broad framework for combating inflation, based on a high-pressure economy approach of proactive but responsible fiscal policy and maintaining accommodative monetary policy, gave rise to stage one of the so-called Takaichi trade: strong equities & a weak yen. Even if the BoJ had considered an October rate hike, it would have been difficult to achieve sufficient communication with the new Takaichi administration by the October meeting. Going forward, while it is a close call between Dec and Jan for the next 25 bps hike by BOJ, we prefer Dec as there are hardly 20 business days between Dec and Jan meetings. In addition, US treasury secretary Bessent & President Trump have time and again pointed out the delayed rate hikes of BOJ artificially depreciating JPY. Also, by 19th Dec, BOJ will have seen if Fed does cut by 25bps in it’s 11th Dec meeting. All these factors lead us to believe that a 25bps rate hike justified for economic reasons and delayed for political reasons shall come eventually in the 19th Dec BOJ meet.
