MUFG Sees Rising Odds of BoJ Rate Hike After Strong Tankan Survey

06:59 AM EDT, 10/01/2025 (MT Newswires) -- MUFG said evidence is mounting that the Bank of Japan could raise rates at its Oct. 30 policy meeting, with Wednesday's Tankan survey for the three months to September offering support for such a move.

The bank noted the BoJ places significant weight on the quarterly Tankan, making the latest results crucial. The Large Manufacturing diffusion index, expected to fall by one point to 12, instead rose to 14. Lumber and wood product firms and iron and steel companies showed weakness amid tariff uncertainties.

Meanwhile, fixed investment plans improved to 8.4% from 6.7% across all enterprises, close to the 8.9% level a year earlier. Employment condition indices across firms of all sizes signaled labor markets remained tight, with some modest additional tightening.

The crucial measure for the BoJ, the inflation outlook for enterprises, showed some softening of output price inflation over a one-year period, but for three and five years, all the indices either remained unchanged or increased further from the June levels. In terms of general prices, final consumer prices, all enterprises anticipated an inflation level of 2.4% in five years, 0.1ppt higher than in June and above the BoJ's inflation target.

So there is certainly no evidence of any softening in long-term inflation expectations across Japan's businesses, stated MUFG. That will encourage the BoJ when assessing the medium-to-long-term outlook for inflation.

The predicted levels for the yen (JPY) revealed little change in the expected USD/JPY rate, but there was about an increase in projected levels for EUR/JPY.

The Tankan will add to the conviction that looks to be growing within the BoJ to hike, added the bank. The Summary of Opinions from the September policy meeting revealed the comment that "we can return to a stance of raising interest rates again," while another suggested the time could be approaching but after "checking the data a little more" before hiking.

With the United States government shutdown, the BoJ may not be able to do that to the extent desired, but MUFG doubts that alone would deter the BoJ from acting. The Tankan report clearly suggests that the U.S.-Japan trade deal has lowered the level of uncertainty and that has helped improve business sentiment.

The yen is the outperformer in the G10 space, advancing against all other G10 currencies with the pricing for a BoJ hike in October at 15bps, according to the bank. The government shutdown uncertainty could curtail speculative positioning for a hike, but BoJ communications suggest there is enough evidence for Japan's central bank to be confident in hiking.

There will be two crucial speeches before the end of the week, noted MUFG. On Thursday, Deputy Governor Uchida speaks at 7:35 a.m. BST at the National Securities Convention of Japan and then the bank thinks the more important speech will be on Friday at 2:05 a.m. BST by Governor Kazuo Ueda at a meeting with business leaders in Osaka.

With the LDP leadership election on Saturday, it may curtail the governor's messaging, but he could still use this opportunity to hint at a shift taking place within the BoJ toward a hike.

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