Recently, the Bank of Japan once again &#34;changed its face&#34; and hawkishly stated that if economic and inflation data meet expectations, it will continue to raise interest rates. However, Goldman Sachs believes that confirming a rebound in inflation will take time, and the best timing for the Bank of Japan to raise interest rates next is still in January next year.
On September 12, Goldman Sachs released a research report stating that the Bank of Japan will carefully evaluate the timing of the next interest rate hike from two perspectives: financial market stability and potential inflation. The bank continues to view the October price revision period as a turning point for Japan's inflation trend, expecting inflation to gradually rise along with prices, making January next year the best time to assess whether inflation is rebounding. Therefore, Goldman Sachs's current basic prediction is that the Bank of Japan will raise interest rates in January next year.
However, the financial market environment is unpredictable. Goldman Sachs believes that if there is significant turmoil and the performance of Japanese economic data is lower than expected, the interest rate hike may be postponed. If the financial market remains stable and data performance is steady, it is also possible for the Bank of Japan to raise interest rates in December this year.
For the upcoming monetary policy meeting on September 19th to 20th, Goldman Sachs expects the Bank of Japan to stand pat and keep the policy rate unchanged at 0.25%.
<h2>Goldman Sachs: October will be a turning point for inflation, January will confirm whether inflation rebounds</h2>
Goldman Sachs stated in the report that after the interest rate hike in July, economic data and inflation trends in Japan basically met the Bank of Japan's expectations. Japan's GDP growth rate rebounded from -0.6% in the first quarter to 0.8% in the second quarter of this year. In terms of inflation, wage increases have transmitted to service prices, with Tokyo's CPI accelerating by 2.6% year-on-year in August.
At the same time, Goldman Sachs continues to view the October price revision period this year as a turning point for Japan's inflation trend, expecting the accelerated rise in wages to transmit to service prices, leading to a gradual increase in inflation along with prices. The bank speculates that the best time to confirm a rebound in inflation will be in January next year. Based on this, Goldman Sachs maintains its basic prediction of the Bank of Japan raising interest rates in January 2025. The bank wrote:
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The best time to confirm whether inflation will rebound with the rise in base prices is January 2025, because (the Bank of Japan) needs to grasp not only the CPI trend starting in October, but also the price-setting behavior of small and medium-sized enterprises in micro information.
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<h2>Financial markets remain volatile, uncertainty persists for the timing of the next interest rate hike</h2>
Goldman Sachs believes that the Bank of Japan's interest rate decision still needs to focus on whether the financial markets are stable.
Last month, on August 5th, global financial markets experienced a major turmoil, with the situation in the Japanese capital market being particularly severe, leading the global stock indices. After the turmoil, the Deputy Governor of the Bank of Japan came forward to reassure the market, publicly stating that if the financial markets are unstable, they will not raise interest rates. At that time, he said:
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Due to the very unstable development of domestic and international financial and capital markets, the Bank of Japan currently needs to maintain loose monetary policy rates. When the financial markets are unstable, the Bank of Japan will not raise interest rates
However, as the Japanese stock market emerges from the gloom, the Japanese yen has been rebounding since August. Goldman Sachs believes that the inflationary risks brought about by the depreciation of the yen have dissipated, which was once considered one of the reasons for the rate hike in July. The bank added that in their view, the Bank of Japan has no reason to rush to raise interest rates again.
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Nevertheless, financial markets are unpredictable, and there is still uncertainty about the timing of the next rate hike by the Bank of Japan, with the possibility of a rate hike in December this year not being ruled out. Goldman Sachs wrote:
<blockquote>
The timing of the next rate hike by the Bank of Japan remains highly uncertain. If financial markets experience a significant decline due to concerns about a recession in the U.S. economy and other factors, economic activity and price inflation trends in Japan may be lower than expected, leading to a delay in the rate hike. If economic, wage, and price data continue to show resilience, and financial markets remain relatively stable, a rate hike in December is possible.
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<h2>Bank of Japan to turn hawkish again: Will continue to raise rates if data meets expectations</h2>
A few days ago, Bank of Japan Governor Haruhiko Kuroda reiterated in a document that if economic and price data meet expectations, the central bank will continue to raise interest rates.
According to Bloomberg, Kuroda submitted a document to the government's economic and fiscal policy group explaining the Bank of Japan's policy decision in July. The document showed that Kuroda stated that due to real interest rates still significantly negative, even after the rate hike in July, the economic environment remains accommodative.
On Thursday, &#34;hawkish&#34; Bank of Japan board member Naoyuki Terada stated that the Bank of Japan should accelerate the pace of rate hikes so that interest rates could reach 1% as early as around October 2025. He also mentioned that as the possibility of Japan's economy sustainably achieving the 2% inflation target increases, the conditions for further rate hikes by the Bank of Japan are gradually maturing

Goldman Sachs believes that evaluating the timing of interest rate hikes should focus on financial market stability and inflation trends. The bank predicts that January next year is the best time to determine whether Japan's inflation will rebound, based on which Japan is expected to raise interest rates in January. However, if there is significant turmoil in the financial markets, the timing of the rate hike will also become uncertain

- The Bank of Japan recently hinted at further rate hikes if economic and inflation data meet expectations, with Goldman Sachs suggesting that confirming a rebound in inflation may take time, making January 2023 the optimal time for the next rate hike.
- Goldman Sachs predicts the Bank of Japan will maintain its policy rate at 0.25% during the upcoming monetary policy meeting on September 19-20, with October seen as a turning point for inflation and January as the key time to assess if inflation rebounds.
- Despite market uncertainties, including recent financial turmoil, the Bank of Japan's next rate hike timing remains uncertain, with December 2022 still a possibility, contingent on stable financial markets and economic data performance.

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How to view the recent "hawkish" stance of the Bank of Japan executives? Goldman Sachs: The next rate hike may still have to wait until January next year