The Bank of Japan’s decision to maintain the policy rate at 0.25% today surprised no-one. Although the quarterly outlook report shows the economy is on track to achieve the 2% inflation target, the central bank is waiting for more data to confirm household income and consumption are recovering, and the US economy is on track for a soft landing.

What you will learn:

• Domestic economic developments generally support the BoJ’s wage-driven inflation story, but the data are being distorted by temporary factors. Although the strong spring wage settlement is being passed on to nominal wages, real income has suffered from higher inflation caused by one-off supply factors.
• We maintain our baseline projection that the BoJ will raise the policy rate in December, assuming a sustained recovery in income and consumption, and the US presidential election doesn’t affect the yen outlook significantly. More evidence of the strength of pay growth in the 2025 Spring Wage negotiation will also emerge in December.
• The BoJ’s next policy move is subject to two major factors. First, given the disastrous election result, the administration of Prime Minister Shigeru Ishiba may become more cautious about the pace of rate hikes. Second, if the US dollar continues to strengthen, the weak yen may come back as a major consideration for the BoJ.