JP Morgan: Bank of Japan's independence is facing a test, still expecting a rate hike this week.

JPMorgan said that this week's Bank of Japan meeting will be a test of its independence from political influence. Based on the expected economic fundamentals, the bank has long forecasted that the Bank of Japan will raise interest rates this week. JPMorgan believes that recent domestic and international economic and market developments provide little reason for the Bank of Japan to delay raising interest rates at this meeting. On the contrary, the necessity for a rate hike has increased. This view is supported by direct communication from the Bank of Japan, which has been signaling that the timing for a rate hike is approaching. However, since Shinzo Abe was elected leader of the Liberal Democratic Party, the market has tended to ignore direct signals from the Bank of Japan, and now it seems to expect a delay in the rate hike. If, as many market participants expect, the Bank of Japan delays the rate hike for political reasons, it would mean neglecting its primary responsibility of maintaining price stability. JPMorgan believes that the Bank of Japan is aware that such actions could damage its reputation, and continues to expect a rate hike in October. That being said, there is still uncertainty about the new government's willingness to intervene in Bank of Japan policy, or the tendency for the Bank of Japan to cater to political preferences. If the Bank of Japan feels the need to spend more time coordinating with the new government before deciding on a rate hike, making policy decisions just over a week after the new government takes office may be more difficult. However, JPMorgan believes that the Kishida administration, which has made fighting inflation its top economic policy priority, is unlikely to heavily influence individual policy decisions of the Bank of Japan. In fact, the communication from the new government so far has followed the Bank of Japan Act, indicating that "specific policy decisions will be left to the Bank of Japan." This reflects that the new government's willingness to accelerate yen depreciation to further combat inflation is no longer in line with their intentions. This meeting is more "real-time" than what is currently reflected in the market pricing. Takata and Tamura, Bank of Japan Policy Board members who voted in favor of raising rates at the September meeting, have continued to advocate for an early rate hike since then. Even Noguchi, who was previously considered dovish, has made positive comments about a rate hike, consistent with minutes from the July meeting where five board members mentioned the need for a timely rate hike. If Takata and Tamura propose keeping rates unchanged, they may face a considerable number of opposing votes. This means that even if the Bank of Japan maintains rates this week (contrary to JPMorgan's expectations), a rate hike is unlikely to be postponed until next year. If JPMorgan's prediction is correct and the Bank of Japan decides to raise rates this week, attention will shift to the Bank of Japan's communication about the neutral rate. Governor Kuroda has previously stated that if rates are raised to 0.75% in the future, he will explain the concept of the neutral rate. The bank expects the Bank of Japan to emphasize that the current market pricing of a 1% terminal interest rate is only the lower limit of the neutral rate. In this way, the Bank of Japan may seek to guide the market to price a terminal rate about 50 basis points higher than the current 1% pricing.