Japan may surprise with interest rate hiatus despite high inflation

The Japanese central bank seems to be refraining from raising interest rates again for the time being. According to insiders, there is little chance that the Bank of Japan (BOJ) will intervene again at the end of October. An interest rate hike in December remains possible. Meanwhile, a weak yen and rising oil prices are putting additional pressure on the Japanese economy.

The Bank of Japan raised interest rates to 1.25 percent in September. It was the second increase in three months and the fastest pace since 1990.

Nevertheless, the central bank does not seem to be in a hurry to take the next step for the time being. According to insiders, who want to remain anonymous to Bloomberg, policymakers tend to leave interest rates untouched at the October 30 meeting.

A final decision has not yet been made. The central bank can adjust its rate at the last minute if new economic figures give reason to do so.

It is not surprising that Japan may be taking a break. The Bank of Japan raised interest rates for the last time in two consecutive months in 1980.

Financial markets are also hardly counting on an interest rate hike in October. Traders estimate that probability at about ten percent. For December, the chance of a new increase is around 88 percent.

Economists are a little more cautious. An earlier survey showed that about a third of them expect an interest rate hike in December, while more than half assume January.

The Japanese central bank is trying to keep inflation sustainably around its target of two percent. According to Governor Kazuo Ueda, underlying inflation is now close to that level.

An important factor in interest rate policy is the Japanese yen. The currency has been under pressure against the US dollar for a long time.

After the news of a possible break in interest rates, the yen initially weakened, only to regain some ground. The exchange rate was around 157.08 yen per dollar.

By way of comparison, just before the rate hike on September 18, the dollar stood at around 155.87 yen.

A weak yen makes imported products more expensive. This is especially important for Japan, which is heavily dependent on energy imports.

Oil prices have risen by about fifteen percent since the end of July. This threatens to further increase costs for businesses and households.

Japanese producer prices rose by 6.8 percent in September compared to a year earlier. While the pace of price increases is slowing, inflationary pressures remain significant.

The Bank of Japan is therefore not only keeping an eye on the exchange rate, but also on developments in the Middle East and the strong demand for artificial intelligence products and services.

During the interest rate meeting on 30 October, the central bank will also publish new economic prospects. This must take into account, among other things, higher oil prices and a possible temporary reduction in the turnover tax on food.

The US interest rate policy is also important for Japan. The interest rate differential between the two countries influences the attractiveness of the yen against the dollar.

Following recent statements by Federal Reserve Board members, investors are not counting on a US interest rate cut in October.

New US inflation figures will appear later this week. These may affect the expectations for the Federal Reserve's interest rate policy and thus also the exchange rate between the dollar and the yen.

US Treasury Secretary Scott Bessent has previously urged Japan to further normalise monetary policy. In addition, at the end of July, the United States and Japan jointly intervened in the foreign exchange market to support the yen.

This remains a difficult consideration for the Bank of Japan. Higher interest rates can support the yen and slow inflation, but at the same time make borrowing more expensive for Japanese households and companies.