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Bank of Japan Likely to Maintain Interest Rate Amid Economic Uncertainty
A Japanese national flag stands prominently as pedestrians pass the Bank of Japan (BOJ) headquarters in Tokyo. This week, the BOJ is anticipated to keep its benchmark interest rate unchanged, focusing on evolving trends in domestic wages and spending, as well as external economic influences that may arise from the forthcoming U.S. administration under President-elect Donald Trump.
A recent survey of economists conducted by CNBC indicates that a slight majority—54% of the 24 economists polled—believe the BOJ will maintain its key interest rate at 0.25% following the conclusion of its two-day meeting on Thursday. Interestingly, the same proportion of analysts predicts a potential rate increase in January. The survey took place from December 9 to 13.
The BOJ, which has not raised rates since July, has hinted that it is poised to tighten monetary policy further if price and wage growth meet its anticipated targets. In a recent interview, BOJ Governor Kazuo Ueda suggested that a rate hike is becoming feasible due to promising economic indicators, albeit with caution regarding potential risks tied to labor trends in the year ahead and shifts in U.S. economic strategies.
The Japanese interest rates remain the lowest among developed nations, a reflection of the BOJ’s enduring strategy to invigorate a sluggish economy. This prolonged low-rate environment has contributed to a weaker yen relative to major currencies, benefiting exports and tourism, and spurring the so-called “carry trade,” where investors utilize yen in anticipation of higher returns elsewhere. These trends could shift course should Japanese rates rise concurrently with declines in interest rates from other central banks.
Economists indicate that Japan’s economy is relatively well-positioned to meet the central bank’s 2% inflation goal, largely attributed to rising wages. Nevertheless, many opine that the BOJ may prefer to bide its time, opting to gather additional insights in light of the upcoming spring wage negotiations and the anticipated U.S. economic policy adjustments.
Akira Otani from Goldman Sachs Japan expressed that the BOJ remains cautious due to a lack of clarity regarding the sustainability of wage increases among small and medium-sized enterprises, a critical element for achieving inflation targets. Typically, Japanese unions negotiate wage hikes during the first quarter of the year, just before the new financial year commences in April.
The sentiment that the BOJ is likely to refrain from changing rates has gained traction following media reports suggesting that policymakers are keen on assessing external risks while further evaluating domestic wage prospects.
Shigeto Nagai, head of Japan Economics at Oxford Economics, noted that the current ambiguous communication from the BOJ points toward a probable decision to keep rates steady, awaiting crucial developments from the spring wage negotiations and shifts in U.S. policy.
Regular wages in Japan have been growing at an annual rate ranging from 2.5% to 3%, while inflation has consistently exceeded the BOJ’s 2% target for 30 consecutive months. While there is a strong desire to normalize monetary policy, authorities remain cautious about implementing rate hikes too swiftly after two decades of economic deflation. Concurrently, household spending has shown a decline for three months leading up to October, reflecting broader volatility in factory output as well.
Teppei Ino, leading Tokyo Global Markets Research at MUFG Bank, pointed to market sentiment shifts influenced by media narratives, with overnight swap markets adjusting expectations regarding a December rate hike. As of Monday morning, these markets assigned a 77% probability to the maintenance of current rates, a significant shift from the approximately 35% likelihood perceived at the end of November.
Ino commented, “Judging by recent media reports, it appears that the chances of a postponed rate hike have increased,” while also highlighting the ongoing depreciation of the yen and the impending Federal Open Markets Committee meeting as factors that could trigger abrupt policy shifts if the USD/JPY exchange rate approaches levels around 155.
As of Monday morning, the yen was trading roughly at 154 against the dollar.
Notably, some economists still project that the BOJ may consider tightening policy in the immediate term. Nomura anticipates a 25 basis point hike this Thursday, citing favorable economic fundamentals. However, they acknowledge that uncertainties surrounding U.S. policy could lead to a delay.
Kyohei Morita, a research analyst, stated, “If the BOJ decides to emphasize uncertainties, particularly regarding U.S. policy and forex market trends during the typically quieter Christmas season, it may choose to defer any rate hike.”
Currency Risks
Analysts have underscored that the Japanese yen’s performance is pivotal in shaping their expectations about BOJ’s decisions.
“The yen is the most significant and likely factor that could alter my outlook,” stated Kazuo Momma, executive economist at Mizuho Research. He predicted that the BOJ would likely maintain its position this week but anticipates a 25 basis point increase in January. He further noted, “A rapid depreciation of the yen would likely lead to public discontent and compel the government to adopt a more aggressive rate hike strategy.”
HSBC’s Asia Economist Jun Takazawa highlighted the dual risks associated with currency fluctuations. “A stronger U.S. dollar, driven by varying fiscal and monetary policies, could weaken the yen and hasten the BOJ’s normalization process. Conversely, a weaker yen—if contained—could facilitate Japan’s reflation efforts, meaning excessive strengthening of the yen could delay rate hikes.”
According to the CNBC survey of 24 analysts, the yen is predicted to average around 147.4 against the U.S. dollar by the close of 2025. In the past week, the dollar appreciated by 2.4% against the yen as traders recalibrated their expectations of a BOJ rate hike this December.
Source
www.cnbc.com