Japan: Review of the Bank of Japan’s Financial Policy Meeting

■ The policy rate remained unchanged, but two members voted against it.  

■ The LDP presidential election provides a glimpse into the new administration's economic and fiscal performance.  
 
At the Bank of Japan's monetary policy decision meeting held on September 18th and 19th, the policy rate remained unchanged, but two members voted against it. Member Takata, believing that the "no price hike" norm has shifted and that the price stability target has been largely achieved, advocated for a rate hike. Member Tamura, however, also advocated for a rate hike to move closer to the neutral rate amidst growing upward price risks. As businesses and households face rising prices, voices within the government increasingly agree that a rate hike is appropriate, raising market expectations for a Bank of Japan rate hike. Following the meeting, the Osaka Stock Exchange's unsecured overnight offered rate (TONA) futures market indicated that an interest rate hike for the year is approximately 80% priced in. With several speeches by Bank of Japan executives scheduled for October, the market will be closely watching for updates on the views of members who previously supported maintaining interest rates. 
 
At a press conference after the meeting, Bank of Japan Governor Ueda reiterated his commitment to adjusting the existing policy of easing if the economic and price outlook gradually materializes. At the same time, he expressed caution about further rate hikes, citing uncertainty surrounding US tariffs and political instability. Ueda noted that tariffs could lead to a cooling of the economy and create downward inflationary risks, potentially impacting corporate investment behavior. He also expressed concern that deteriorating corporate performance could weaken the momentum for wage increases during the 2026 Spring Term. With the Liberal Democratic Party presidential election approaching on September 22nd, the market is closely watching how the Bank of Japan will assess the impact of the new administration's economic and fiscal operations on the economy and prices. 
 
Furthermore, regarding its holdings of index-linked exchange-traded funds (ETFs) and real estate investment trusts (J-REITs), the Bank of Japan unanimously agreed to conduct a market sale of its holdings of index-linked exchange-traded funds (ETFs) and real estate investment trusts (J-REITs), based on the sales volume of its shares purchased from financial institutions (approximately 330 billion yen per year at book value for ETFs and approximately 620 billion yen at market value) completed by July 2025. The Bank of Japan stated it is not considering further purchases under easing conditions, but will maintain flexibility by temporarily adjusting or suspending sales, aiming to leverage experience with stock sales and minimize market shocks. Based on buying and selling trends by investment entity as of the second week of September, overseas investors have net bought ¥3.3763 trillion year-to-date, while corporate entities have net bought ¥8.1657 trillion. In contrast, sales of the Bank of Japan ETF will begin at an extremely slow pace, and unless they accelerate significantly, they are not expected to impact stock prices.