• The Bank of Japan (BOJ) plans to maintain ultra-low interest rates due to easing U.S. recession fears and to deter yen devaluation.
• A potential policy shift could prevent the yen from reaching new lows, which is crucial to avoid escalating costs of imports.
• The BOJ's meeting is expected to result in short-term interest rates remaining steady at 0.25%.
• Increasing pay and sustained wage gains are bolstering consumption, prompting firms to raise prices for goods and services.

The Bank of Japan (BOJ) is poised to maintain its ultra-low interest rates in the upcoming week, a move that is largely attributed to the diminishing fears of a U.S. recession and the necessity to deter speculators from excessively devaluing the yen. This decision comes after the BOJ concluded its radical stimulus program in March, which had been in place for a decade.

The BOJ had previously signaled its intention to incrementally raise interest rates from their current rock-bottom levels. However, the bank was compelled to moderate its hawkish stance and commit to a more cautious approach in raising rates. This change in strategy was necessitated after a rate hike in July was implicated in causing a market turmoil.

Despite the BOJ's current reluctance to increase rates, any shift towards a less dovish stance would highlight its intention to retain flexibility regarding the timing of its next move. This is according to analysts who have been closely monitoring the bank's monetary policy.

BOJ's Strategy to Prevent Yen's Further Depreciation

The yen, which has recently resumed its decline, could be prevented from reaching new lows by this potential policy shift. This is crucial as a further depreciation of the yen could exacerbate the already weak consumption by escalating the costs of fuel and food imports.

Ryutaro Kono, the chief economist for Japan at BNP Paribas, opined, As the yen is falling again, the BOJ will probably try to avoid sending a message that would appear too dovish.

The BOJ's two-day meeting, which concludes on October 31, is expected to result in the short-term interest rates remaining steady at 0.25%. Furthermore, in a quarterly report set to be released after the meeting, the board is not anticipated to make any significant changes to its forecast that inflation will hover around 2% until early 2027.

Rising Pay and Wage Gains Bolstering Consumption

Recent domestic data have largely corroborated the BOJ's perspective that increasing pay and the prospect of sustained wage gains are bolstering consumption. This, in turn, is prompting more firms to raise prices, not just for goods but also for services.

The labor shortage, which is becoming more severe, is also raising expectations that companies will continue to increase pay in the coming year. This is according to three sources who are familiar with the BOJ's thinking.

One of these sources stated, Japan's economy is on track for a recovery. Another source added, Prices will likely keep rising as many companies have yet to fully pass on rising costs.

The BOJ may incorporate such progress made on the wage and price front in its report. This would underline its belief that the conditions necessary for more rate hikes are falling into place.