Bank of Japan Governor Kazuo Ueda indicated that risks from overseas economies, including the United States, have diminished, suggesting the central bank may implement further rate hikes in the coming months.

Following a two-day meeting, the BOJ maintained its policy rate around 0.25% as market expected. This decision was made amid political uncertainty following the ruling party’s loss of majority seats in recent elections, and on the eve of the U.S. presidential election.

At the post-meeting press conference, Ueda stated that his concerns about the U.S. economy have eased, citing strong economic indicators. He noted that risks from overseas economies are gradually decreasing and the situation is becoming clearer. While last month Ueda emphasized that the bank had “more time” to assess the need for further rate hikes, at this press conference he said he would no longer use this phrase, adding that the bank would implement further rate increases if Japan’s economic and price trends meet expectations.

The BOJ also updated its growth and inflation forecasts. Core consumer price index (excluding fresh food) is expected to reach 2.5% this fiscal year (ending March next year), consistent with previous projections. However, the inflation forecast for fiscal 2025 was revised down to 1.9% from 2.1%, below the bank’s 2% price stability target, citing recent declines in oil and other natural resource costs that might affect overall price trends. The forecast for fiscal 2026 remains unchanged at 1.9%.

The policy committee examined the impact on financial markets of Sunday’s setback in the House of Representatives election for Prime Minister Ishibashi Shigeru’s Liberal Democratic Party and its ally Komeito. Analysts suggest that the complicated political situation may make Ishibashi cautious about supporting the BOJ’s policy shift, as it would mean farewell to a decade of unconventional monetary easing and a transition to higher borrowing costs that could slow economic activity.

The BOJ is also awaiting the results of the U.S. presidential election on November 5, which could significantly impact financial markets. Regardless of whether Democratic candidate Kamala Harris or Republican candidate Trump wins, the U.S. government is likely to increase public spending. Analysts believe this could lead to higher inflation, prompting the Federal Reserve to slow its pace of rate cuts, consequently leading to further weakening of the yen.

In its latest economic outlook, the BOJ raised its fiscal 2025 economic growth forecast to 1.1% from 1.0%, while maintaining real GDP growth forecasts for fiscal 2024 and 2026 at 0.6% and 1.0% respectively.

Key Points:

• BOJ maintains current rates but hints at possible future hikes.
• Governor indicates overseas economic risks are diminishing.
• Fiscal 2025 inflation forecast revised down to 1.9%, below 2% target.
• Political factors and U.S. election become important policy considerations.
• BOJ ended negative interest rate policy in March, implementing first rate hike in 17 years.