Kazuo Ueda conveys cautious signals as the market bets on the Bank of Japan raising interest rates in January next year

According to the Zhitong Finance APP, Bank of Japan Governor Kazuo Ueda likely remains unconvinced that global headwinds will allow the central bank to raise interest rates as early as this month after concluding his trip to Washington last week. Meanwhile, global finance officials are warning of the downside risks posed by the renewed escalation of U.S.-China trade tensions. The International Monetary Fund emphasized the resilience of the global economy in its latest World Economic Outlook released last week, which also provides cover for Ueda—if the hawkish members within the Bank of Japan wish to act sooner, he could also raise rates in the short term. Therefore, Ueda gave almost no clues regarding the timing of a rate hike, leaving options open for himself. The market is betting that a rate hike will materialize before January next year. After attending the G20 finance ministers' meeting in Washington last Thursday, Ueda stated at a press conference, "My view on the global and U.S. economy has not changed much compared to when I was in Japan." When asked whether a rate hike might occur at the policy meeting on October 29-30, he said, "I hope to continue gathering more information and carefully examine the various data released before the October meeting." Earlier this month, Ueda expressed hope that discussions with finance officials and bankers from various countries would provide a basis for the central bank's judgment on whether to raise rates at the end of October, which is why the market has been closely watching his statements in Washington. Ueda repeatedly reminded not to raise borrowing costs too early, emphasizing the need to assess the strength of the U.S. economy and the extent of damage caused to Japan's export-dependent economy by U.S. tariffs. The Washington meeting does not seem to have clarified when the fog shrouding the global outlook will lift for Ueda. Pressure for Faster Rate Hikes Within the Bank of Japan The IMF raised its global growth forecast for 2025 last week but warned that the rekindling of the U.S.-China trade war could drag down output. While IMF member countries affirm the resilience of global growth, they also express concerns about emerging tensions and outlook risks. An IMF senior official told Reuters that there are downside risks to the Japanese economy and urged the Bank of Japan to raise rates "very gradually" due to the high uncertainty in the outlook. Although Ueda has ample reason to maintain interest rates, he faces pressure from within the central bank to act more quickly. Inflation has remained above the 2% target for three consecutive years, and the Japanese economy has so far withstood the impact of U.S. tariffs; since raising the policy interest rate to 0.5% in January, the central bank has paused rate hikes, but the board is gradually leaning towards resuming them. Among the nine board members, two proposed a rate hike in September, but it was not approved; subsequently, another traditionally dovish member unexpectedly stated that the necessity for a rate hike is "greater than ever." If a rate hike is delayed, the yen may fall again, further raising living costs by increasing import prices. Former Bank of Japan Executive Director Tomoyuki Shimada stated, "If the central bank does not raise rates in October, the next opportunity will be in December; during this period, there is a risk of further decline in the yen." However, the overall tone of Ueda and his staff indicates that the central bank will take a slow pace, partly because raising the key rate to 0.75% would bring it to a level not seen in thirty years The Japanese Diet is expected to vote for a new Prime Minister on Tuesday, and the central bank has little time to communicate with the new government before the next policy meeting. The likely new Prime Minister, Sanae Takaichi, is a supporter of loose monetary policy. At a seminar in Washington last Thursday, Bank of Japan Deputy Governor Masayoshi Amamiya stated, "We do not know how the economy will specifically respond to interest rate hikes, which is another uncertainty we face now, so it is necessary to proceed with caution."