Interest Decision in Japan: Between Growth and Tariffs

The Japanese central bank, known as the Bank of Japan (BOJ), is facing the possibility of revising its economic outlook and inflation forecasts upward in October. This adjustment could pave the way for an imminent interest rate hike, as former BOJ director Seiji Adachi stated in an interview. Currently, the market estimates the probability of an interest rate hike at about 50 percent at the next BOJ meeting on October 29 and 30. Adachi emphasized that the impact of US tariffs on Japan's economy and wages must be carefully considered before continuing with rate hikes. If the BOJ focuses on the risks, a decision in favor of later rate steps, possibly in March, might be made. However, stronger-than-expected economic performance in the second quarter could boost the BOJ's forecasts and keep inflation rates near the 2-percent target. While current Japanese export and corporate profits show some weaknesses, previous votes within the BOJ board indicated a divided view on the need for an immediate rate hike. Two board members already advocated last week for an increase to 0.75 percent, which fueled market participants' expectations for future rate steps. Another crucial factor could be the BOJ's quarterly 'Tankan' survey on October 1, which includes the five-year inflation expectations of companies. If these rise from the current 2.3 percent to 2.5 percent, it could increase pressure on the BOJ to sustainably achieve the 2-percent inflation target and raise interest rates.