Takahide Kiuchi, Executive Economist, Financial Technology Solution Division
At the Monetary Policy Meeting (MPM) held on October 30, 2025, the Bank of Japan decided to keep policy interest rates unchanged, in line with most forecasts. It can be inferred that the desire to avoid any conflict with the new Takaichi Administration—which wants the Bank of Japan to continue monetary easing (also called monetary accommodation)—was likely the main reason the bank decided to delay a rate hike (i.e., raising policy interest rates). However, there are expectations that the Takaichi Administration may gradually shift toward allowing the Bank of Japan to raise interest rates. In that case, the hikes may resume as soon as this December, or perhaps as late as January when the next MPM is scheduled to be held.
Did the Bank of Japan have the new administration in mind in postponing additional rate hikes?
In the Outlook Report released by the Bank of Japan following the meeting, it was indicated that “it still remains highly uncertain how overseas economic activity and prices will react to trade and other policies in each jurisdiction”, reflecting an awareness of the impact of the Trump Administration’s tariff policies. Furthermore, Governor Ueda explained that the bank was closely watching how those policies would affect next year’s “shunto” (spring labor-management wage negotiations).
In response to Governor Ueda’s remark that he “would like to see the initial momentum of the shunto”, the financial market has been focused on when and where the Bank of Japan might go about obtaining such information, all while speculating about the timing of the next rate hike.
Yet Ueda’s statement about watching the shunto closely does follow the Bank of Japan’s previous explanation that rising wages are the key to sustainably achieving the Bank’s 2% price stability target, so perhaps this is at least partly about preserving appearances. We may infer that the main reason the Bank decided to postpone rate hikes at this MPM was to avoid confrontation with the Takaichi Administration, which has questioned the Bank of Japan’s stance on rate hikes.
Prime Minister Takaichi’s economic policies rest on two main pillars: an expansionary fiscal policy and maintaining monetary easing. This approach inherits the “first arrow” and “second arrow” of Abenomics, the term given to the economic policies of the former Abe Administration.
The Prime Minister has made comments suggesting that in her view, the government is responsible for fiscal policy as well as monetary policy, and that it is the government that must decide monetary policy. This would appear to be based on a legal interpretation that does not recognize the Bank of Japan’s prerogative to independently determine the country’s monetary policy, as laid out in Article 4 of the Bank of Japan Act which states that “the Bank of Japan must always maintain close contact with the government and exchange views sufficiently, so that [its currency and monetary control and] the basic stance of the government's economic policy are mutually compatible”. However, that approach would seem to be at odds with the fundamental philosophy of the Bank of Japan Act, which respects the Bank of Japan’s independence.
Under the Takaichi Administration, the Bank of Japan is arguably facing the most significant political pressure it has seen since the former Abe Administration. As the U.S. Federal Reserve Board (FRB) finds itself subjected to intense political intervention by the Trump Administration, most notably in the form of calls for it to cut interest rates, the world’s central banks and financial markets are now also greatly concerned about the mounting political pressure on the Bank of Japan. This is because such pressure could damage the credibility of the nation’s currency, potentially destabilizing the financial markets.
In response to Governor Ueda’s remark that he “would like to see the initial momentum of the shunto”, the financial market has been focused on when and where the Bank of Japan might go about obtaining such information, all while speculating about the timing of the next rate hike.
Yet Ueda’s statement about watching the shunto closely does follow the Bank of Japan’s previous explanation that rising wages are the key to sustainably achieving the Bank’s 2% price stability target, so perhaps this is at least partly about preserving appearances. We may infer that the main reason the Bank decided to postpone rate hikes at this MPM was to avoid confrontation with the Takaichi Administration, which has questioned the Bank of Japan’s stance on rate hikes.
Prime Minister Takaichi’s economic policies rest on two main pillars: an expansionary fiscal policy and maintaining monetary easing. This approach inherits the “first arrow” and “second arrow” of Abenomics, the term given to the economic policies of the former Abe Administration.
The Prime Minister has made comments suggesting that in her view, the government is responsible for fiscal policy as well as monetary policy, and that it is the government that must decide monetary policy. This would appear to be based on a legal interpretation that does not recognize the Bank of Japan’s prerogative to independently determine the country’s monetary policy, as laid out in Article 4 of the Bank of Japan Act which states that “the Bank of Japan must always maintain close contact with the government and exchange views sufficiently, so that [its currency and monetary control and] the basic stance of the government's economic policy are mutually compatible”. However, that approach would seem to be at odds with the fundamental philosophy of the Bank of Japan Act, which respects the Bank of Japan’s independence.
Under the Takaichi Administration, the Bank of Japan is arguably facing the most significant political pressure it has seen since the former Abe Administration. As the U.S. Federal Reserve Board (FRB) finds itself subjected to intense political intervention by the Trump Administration, most notably in the form of calls for it to cut interest rates, the world’s central banks and financial markets are now also greatly concerned about the mounting political pressure on the Bank of Japan. This is because such pressure could damage the credibility of the nation’s currency, potentially destabilizing the financial markets.
Policy interest rate hikes do not equal monetary tightening
Even if one assumes that the Bank of Japan put off a rate hike in the interest of avoiding a conflict with the Takaichi Administration, the chance that it has abandoned the idea of raising interest rates entirely would seem to be quite low. It also seems possible that the Bank of Japan has already begun talks behind the scenes with the Takaichi Administration concerning monetary policy.
Prime Minister Takaichi believes that the current high inflation rate is not the “demand-pull” type driven by strong demand, but rather is the “cost-push” type attributable to the rise in import prices spurred on by the weak yen, the sort that will have adverse effects on the economy. Therefore, she is concerned that if the Bank of Japan raises policy interest rates simply because the consumer price inflation rate remains above the 2% target, it could trigger negative economic consequences, and ultimately undercut people’s livelihoods.
While such concerns are understandable, the important thing here is that the current monetary policy is substantially tamping down on the inflation rate, and that easy money conditions are still in effect. For its part, the Bank of Japan has indicated that it intends to maintain these current easy money conditions, given that underlying inflation remains below the 2% price stability target.
Raising policy interest rates is often referred to as ‘monetary tightening,’ but this perspective focuses solely on the direction of rate changes. In reality, central banks tend to emphasize the level of policy interest rates rather than their direction. For that reason, it does not consider raising policy interest rates to equate to monetary tightening.
Current efforts to normalize monetary policy are adjustments aimed at gradually scaling down these easy money conditions by way of raising policy interest rates, and given that policy interest rates are still below levels that would be neutral for the economy, the risk that these moves could cause economic conditions to deteriorate is small, or so the Bank of Japan is likely trying to convince Prime Minister Takaichi.
Prime Minister Takaichi believes that the current high inflation rate is not the “demand-pull” type driven by strong demand, but rather is the “cost-push” type attributable to the rise in import prices spurred on by the weak yen, the sort that will have adverse effects on the economy. Therefore, she is concerned that if the Bank of Japan raises policy interest rates simply because the consumer price inflation rate remains above the 2% target, it could trigger negative economic consequences, and ultimately undercut people’s livelihoods.
While such concerns are understandable, the important thing here is that the current monetary policy is substantially tamping down on the inflation rate, and that easy money conditions are still in effect. For its part, the Bank of Japan has indicated that it intends to maintain these current easy money conditions, given that underlying inflation remains below the 2% price stability target.
Raising policy interest rates is often referred to as ‘monetary tightening,’ but this perspective focuses solely on the direction of rate changes. In reality, central banks tend to emphasize the level of policy interest rates rather than their direction. For that reason, it does not consider raising policy interest rates to equate to monetary tightening.
Current efforts to normalize monetary policy are adjustments aimed at gradually scaling down these easy money conditions by way of raising policy interest rates, and given that policy interest rates are still below levels that would be neutral for the economy, the risk that these moves could cause economic conditions to deteriorate is small, or so the Bank of Japan is likely trying to convince Prime Minister Takaichi.
Four factors encouraging the Takaichi Administration to revise its monetary policy stance
Restricting the Bank of Japan from gradually raising policy interest rates to a neutral level could actually undermine economic and financial market stability, potentially creating challenges for everyday life.
If the perception that the Bank of Japan is being prevented from raising rates due to political pressure spreads in financial markets, it would further weaken the yen in foreign exchange market. The depreciation of the yen would on the one hand boost the earnings of export companies, and send stock prices higher, benefiting wealthy investors who hold substantial stock portfolios.
Yet on the other hand, the yen’s depreciation would send import prices upward, ultimately leading prices to remain higher for longer – in particular, food and energy. This would likely hurt the livelihoods of low-income earners especially. The Takaichi Administration may be inclined to give priority to combatting high prices, but if it ramps up the political pressure on the Bank of Japan, it would be creating a paradox in the sense that the weak yen and high prices would put pressure on people’s lives.
Were awareness of such a problem to become more widespread among the public, and public opinion to grow more critical of the political pressure being placed on the Bank of Japan’s monetary policy, that would conceivably be a factor encouraging the administration to change its mind about seeking to continue with monetary easing.
Going forward, the Takaichi Administration may be expected to gradually ease away from calling for the Bank of Japan to maintain monetary easing. One reason for this is its concerns over the risk of the yen’s depreciation, but there are three other possible reasons as well.
The first is the intentions of the Trump Administration, which expects the depreciation of the yen to be corrected via rate hikes enacted by the Bank of Japan. During his trip to Japan, U.S. Treasury Secretary Scott Bessent remarked on October 29 that “the government’s willingness to allow the Bank of Japan policy space will be key to anchoring inflation expectations and avoiding excess exchange rate volatility, calling on the Japanese government not to obstruct the Bank of Japan from raising interest rates.
While the Takaichi Administration and the Bank of Japan are both likely to refuse to simply reflect the views of foreign governments in their own policy decisions, in actuality, the Takaichi Administration may very well give a certain amount of consideration to the Trump Administration’s intentions, and lessen the political pressure on the Bank of Japan. From the Bank of Japan’s perspective, that type of external pressure would likely aid it in promoting rate hikes.
The second is the fact that the ruling Liberal Democratic Party (LDP) and its coalition partner the Japan Restoration Party (JIP) have adopted a basic stance that entails respecting the independence of the Bank of Japan. And the third is that LDP Vice President Taro Aso and his faction who support the Takaichi Administration are also inclined to respect the Bank’s independence. I think it is possible that the Takaichi Administration, mindful of the JIP and the Aso faction, will move to ease up on the political pressure on the Bank of Japan.
If the Takaichi Administration does relax the political pressure on the Bank of Japan and gradually change its attitude to one more permissive toward interest rate hikes, then as early as the next MPM this December, or perhaps no later than the following on in January of next year, conditions would conceivably be in place for the Bank of Japan to resume raising interest rates for the first time in nearly a year since this past January.
If such expectations build in financial markets going forward, we could see the yen start to appreciate in foreign exchange markets, with the easing inflation rate supporting consumer spending.
If the perception that the Bank of Japan is being prevented from raising rates due to political pressure spreads in financial markets, it would further weaken the yen in foreign exchange market. The depreciation of the yen would on the one hand boost the earnings of export companies, and send stock prices higher, benefiting wealthy investors who hold substantial stock portfolios.
Yet on the other hand, the yen’s depreciation would send import prices upward, ultimately leading prices to remain higher for longer – in particular, food and energy. This would likely hurt the livelihoods of low-income earners especially. The Takaichi Administration may be inclined to give priority to combatting high prices, but if it ramps up the political pressure on the Bank of Japan, it would be creating a paradox in the sense that the weak yen and high prices would put pressure on people’s lives.
Were awareness of such a problem to become more widespread among the public, and public opinion to grow more critical of the political pressure being placed on the Bank of Japan’s monetary policy, that would conceivably be a factor encouraging the administration to change its mind about seeking to continue with monetary easing.
Going forward, the Takaichi Administration may be expected to gradually ease away from calling for the Bank of Japan to maintain monetary easing. One reason for this is its concerns over the risk of the yen’s depreciation, but there are three other possible reasons as well.
The first is the intentions of the Trump Administration, which expects the depreciation of the yen to be corrected via rate hikes enacted by the Bank of Japan. During his trip to Japan, U.S. Treasury Secretary Scott Bessent remarked on October 29 that “the government’s willingness to allow the Bank of Japan policy space will be key to anchoring inflation expectations and avoiding excess exchange rate volatility, calling on the Japanese government not to obstruct the Bank of Japan from raising interest rates.
While the Takaichi Administration and the Bank of Japan are both likely to refuse to simply reflect the views of foreign governments in their own policy decisions, in actuality, the Takaichi Administration may very well give a certain amount of consideration to the Trump Administration’s intentions, and lessen the political pressure on the Bank of Japan. From the Bank of Japan’s perspective, that type of external pressure would likely aid it in promoting rate hikes.
The second is the fact that the ruling Liberal Democratic Party (LDP) and its coalition partner the Japan Restoration Party (JIP) have adopted a basic stance that entails respecting the independence of the Bank of Japan. And the third is that LDP Vice President Taro Aso and his faction who support the Takaichi Administration are also inclined to respect the Bank’s independence. I think it is possible that the Takaichi Administration, mindful of the JIP and the Aso faction, will move to ease up on the political pressure on the Bank of Japan.
If the Takaichi Administration does relax the political pressure on the Bank of Japan and gradually change its attitude to one more permissive toward interest rate hikes, then as early as the next MPM this December, or perhaps no later than the following on in January of next year, conditions would conceivably be in place for the Bank of Japan to resume raising interest rates for the first time in nearly a year since this past January.
If such expectations build in financial markets going forward, we could see the yen start to appreciate in foreign exchange markets, with the easing inflation rate supporting consumer spending.
Profile
-
Takahide KiuchiPortraits of Takahide Kiuchi
Executive Economist
Takahide Kiuchi started his career as an economist in 1987, as he joined Nomura Research Institute. His first assignment was research and forecast of Japanese economy. In 1990, he joined Nomura Research Institute Deutschland as an economist of German and European economy. In 1996, he started covering US economy in New York Office. He transferred to Nomura Securities in 2004, and four years later, he was assigned to Head of Economic Research Department and Chief Economist in 2007. He was in charge of Japanese Economy in Global Research Team. In 2012, He was nominated by Cabinet and approved by Diet as Member of the Policy Board, the committee of the highest decision making in Bank of Japan. He implemented decisions on the Bank’s important policies and operations including monetary policy for five years.
* Organization names and job titles may differ from the current version.