AI Stock Rout Puts BOJ's December Rate Hike Under the Microscope

A summary of opinions from the BOJ's October meeting, released Tuesday, laid bare a split on the board over how tight money really is. Some members saw little impact from past rate hikes, while others flagged the potential hit to growth. One pushed for financial conditions to be judged on three measures: the real interest rate gap, corporate finance and the bank lending channel, and asset prices. That last one, the member noted, is driven by more than monetary policy — as the AI-fueled rally in stocks showed.

Markets have regained some calm after a steep selloff in AI stocks, and many analysts still expect the BOJ to keep raising rates, with the next hike projected as soon as December. The central bank has argued hikes are needed to counter upside price risks and stop underlying inflation from overshooting its 2% target. It has also pointed to low real borrowing costs, strong corporate funding demand and rising bank lending as proof that conditions remain easy.

The less-discussed language on financial conditions could matter more if the equity downturn drags on. It acts as a gauge of how close the policy rate sits to neutral, and therefore hints at how fast and how far the BOJ can move. Tetsuya Inoue, a former BOJ official now executive economist at Sony Financial Group, said the central bank's basic view is that conditions remain loose and won't flip just because stocks fall. But he added that unstable asset prices could cool corporate mood and household spending, and depending on how markets behave, give the BOJ reason to delay a December hike.

The stakes are higher because Japanese households have jumped into the market. Their stock holdings hit 486 trillion yen ($3.08 trillion) in June, BOJ data showed, up 47% from a year earlier and equal to 19.3% of total household wealth. The BOJ said in its quarterly outlook report last month that the uptrend in share prices likely lowered firms' cost of capital and supported consumption through wealth effects. Seisaku Kameda, the BOJ's former top economist now at Sompo Institute Plus, said that effect is small next to the US, but could still move consumption meaningfully given how many younger Japanese now own stocks.

In its October statement, the BOJ called financial conditions accommodative 'in light of recent developments in asset markets.' Sources familiar with the central bank's thinking said the theory is simple: falling stock prices tighten conditions. They spoke anonymously because they aren't authorized to speak publicly, and one added there is still time before the December meeting — and no way to know how markets will be behaving by then.

Next up is Governor Kazuo Ueda's speech on November 30, where markets will parse how he frames the rout's impact on financial conditions. That lands before the BOJ's policy meeting on December 17 and 18.