Bank of Japan likely to keep policy rate unchanged…"33% chance of a hike in October"

Prime minister frontrunner Takaichi, pro-expansionary fiscal stance

"Inflation and the weak yen can no longer be left unchecked"

With the Bank of Japan expected to keep the policy rate unchanged this month, the prospect of a rate hike in October is increasingly receding.

On the 15th, the Nihon Keizai Shimbun reported that the Bank of Japan is likely to keep the policy rate at 0.5% at the Monetary Policy meeting scheduled for the 18th–19th. If the rate is kept unchanged this month, it would mean postponing a rate increase for the fifth consecutive time since the January rise this year. The Nihon Keizai Shimbun reported, "Within the Bank of Japan, voices are growing to wait and see the impact of U.S. tariff policy on the economy."

With Shigeru Ishiba indicating his intention to resign from the LDP presidency, the possibility of an October hike is also diminishing. According to an expert survey conducted by Totan Research, the probabilities of a Bank of Japan rate hike were tallied at 1% for September, 33% for October, 32% for December, and 21% for January 2026. The expected probability for an October hike once reached the mid-40% range but has now fallen to 33%.

Sanae Takaichi, the former Minister of Economic Security who is regarded as the new LDP president and the likely next Japanese prime minister, is expected to inherit "Abenomics," which stimulates the economy through fiscal expansion. The Nihon Keizai Shimbun reported, "There are expectations that if Takaichi is elected, there will be a headwind against an early policy rate hike," and "questions are being raised about whether the Bank of Japan could raise the policy rate less than a month after the new prime minister takes office."

The LDP will hold its presidential election on the 4th of next month. The new prime minister is likely to be decided as early as early October. It is expected that the new prime minister will take office before the Bank of Japan's October monetary policy meeting (29–30).

However, there are still voices within the Bank of Japan saying that rate hikes should not continue to be delayed. The Nihon Keizai Shimbun pointed out, "If rate hikes continue to be delayed, the value of the yen could fall further and inflation could worsen."

Mansu Choi, reporter bebop@hankyung.com