No rate hike, but there is a significant change at the Bank of Japan.
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Deutsche Bank believes that future fluctuations in the yen's exchange rate will become a key indicator for predicting the timing of rate hikes.
According to news from Chasewind Trading Desk, on October 30, Deutsche Bank released a research report pointing out that the Bank of Japan kept rates unchanged in October, but sent a key signal of a policy shift — in the future, it will focus more on actual inflation rather than merely on underlying inflation.
The report analyzes that this signal means if the yen continues to depreciate, pushing up actual inflation, the central bank may accelerate rate hikes. Conversely, if actual inflation falls below the 2% target, the rate hike process may be postponed until after April 2026.
Deutsche Bank emphasized that if USD/JPY approaches 160, the probability of a hike in December will rise significantly. They also maintain their previous forecast that there will be 25-basis point hikes in January 2026, July 2026, and January 2027, with the policy rate eventually reaching 1.25%.
Bank of Japan Stays Put
At its monetary policy meeting on October 30, the Bank of Japan maintained the current policy rate as expected.
The report notes that Policy Board Members Naoki Tamura and Hajime Takata again advocated for a rate hike, as in the September meeting, showing continued hawkish voices within the central bank, though this did not alter the final policy decision.
In addition, the newly appointed Minister for Economic and Fiscal Policy, Yoshitaka Shindo, attended this meeting. It’s unclear whether his attendance influenced the discussion, and more details are expected in the upcoming “Summary of Opinions” and meeting minutes.
In the simultaneously released “Outlook for Economic Activity and Prices” report, the central bank made tweaks.
The report raised the median growth forecast for fiscal 2025 by 0.1 percentage point and upped the median forecast for core CPI inflation for fiscal 2026 by 0.1 percentage point.
However, because a 0.1 percentage point change is too small, the report text still states “broadly unchanged from the July forecast.” This was a “slightly dovish surprise” for the market, which previously expected growth and inflation forecasts to be revised up by 0.2 percentage points.
On risk balance, the report believes there are higher downside risks to economic growth, while inflation risks are balanced in both directions, with no major change from the July assessment. Still, the number of members who see upside risks to inflation remains at three, while those who see downside risks decreased from three in July to two.
According to Deutsche Bank's analysis, if by the next Outlook report in January one more member shifts to view significant upside risk, or one fewer member judges significant downside risk, the inflation risk balance could be considered “tilted to the upside.” This could give the central bank an excuse to start hiking rates.
The Real Change: Policy Focus Shifts to “Actual Inflation”
Deutsche Bank pointed out that the biggest change in this Bank of Japan meeting is a shift in policy focus revealed in the Outlook Report. The summary section of the report clearly states:
...It is expected that the rate of underlying CPI inflation and the year-on-year increase in CPI (excluding fresh food) will gradually rise, and in the second half of the forecast period, remain basically in line with the price stability target.
This differs significantly from the July report, which stated:
Thereafter, as economic growth rises, labor shortages are expected to intensify, medium- to long-term inflation expectations are expected to rise, and underlying CPI inflation is expected to increase gradually. In the latter half of the forecast period, underlying CPI inflation could reach a level basically consistent with the price stability target.
Deutsche Bank interprets this as a clear signal that the Bank of Japan is now placing more importance on actual inflation rather than just underlying inflation when assessing the price stability target. This change was already foreshadowed in BOJ Governor Kazuo Ueda’s speech on October 3.
The July policy meeting “Summary of Opinions” noted:
When underlying inflation is well below 2%, its importance in policy decisions outweighs that of actual inflation. However, as underlying inflation approaches 2%, the importance of actual inflation increases.
The report analyzes that, since the BOJ forecasts “the year-on-year increase in CPI (excluding fresh food) may decelerate to below 2% in the first half of fiscal 2026,” the central bank is unlikely to rush to raise rates after April 2026.
Probability of a January BOJ Rate Hike is Greater Than in December
BOJ Governor Kazuo Ueda struck a generally dovish tone at the post-meeting press conference, signaling no hint of a rate hike in December.
He reiterated that although certainty over the economic outlook is increasing, he wants to see more data, especially the “momentum of wage negotiations” in next year’s “Shunto” (spring wage negotiations). This suggests a rate hike in December is unlikely.
Deutsche Bank believes the January 2026 meeting is more likely to be the timing for a rate hike than December. Reasons include:
Policy coordination: The government has just finalized economic measures; it would seem inconsistent for the central bank to hike rates immediately afterward.Information adequacy: By January, information on Shunto wage negotiations will be clearer, and regional branch managers’ reports will provide important references. A new “Outlook Report” will also be released.Timing window: The January meeting may coincide with a parliamentary recess, providing a better window for ample communication between the central bank and the government.
Therefore, Deutsche Bank maintains its core forecast: The Bank of Japan will hike rates by 25 basis points in January 2026, July 2026, and January 2027, with the final policy rate reaching 1.25%.
However, the report emphasizes that exchange rates are the biggest variable. If the yen continues to depreciate, pushing USD/JPY toward the psychological threshold of 160, the chance of a December rate hike will rise significantly in order to curb imported inflation.
In addition, if the government intervenes in the currency market to buy yen, from a policy consistency perspective, this would also make it easier for the central bank to take rate hike action.
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The above highlights are from Chasewind Trading Desk.
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