Will the Bank of Japan Raise Rates in Next Week’s Meeting

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The Bank of Japan (BOJ) is set to hold its final policy meeting of the year next week, with its decision to be announced just hours after the U.S. Federal Reserve's anticipated interest rate cut.

Is the BOJ Likely to Raise Interest Rates?

The BOJ ended its negative interest rate policy in March and raised its short-term policy target to 0.25% in July.

The bank has indicated a willingness to hike again if wages and prices evolve as expected. There is increasing confidence within the BOJ that conditions are aligning for another rate hike to 0.5%. Japan's economy is growing moderately, wages are rising steadily, and inflation has stayed above the 2% target for over two years.

However, the BOJ appears cautious about acting quickly due to the yen's rebound, which has eased inflationary pressures, and uncertainties around U.S. President-elect Donald Trump's policies.

The decision on whether to raise rates in December or delay until January will depend on the BOJ's confidence in Japan's ability to sustain the 2% inflation target.

What Have BOJ Policymakers Said?

The BOJ has kept its cards close to its chest regarding the timing of the next rate hike. Governor Kazuo Ueda recently acknowledged that another rate hike is likely but didn’t suggest it would happen this month.

Dovish board member Toyoaki Nakamura indicated he wasn’t opposed to rate hikes but stressed that the decision should be data-driven. While the BOJ is aiming for a rate hike by March, recent comments suggest it is leaving the timing flexible.

When Do Markets and Analysts Expect the Next Rate Hike?

More than half of economists surveyed by Reuters last month expect the BOJ to raise rates in December, with about 90% predicting a hike to 0.5% by March. In contrast, markets are currently pricing in only a 30% chance of a rate hike in December.

How Could Markets React?

The BOJ's decision will come shortly after the U.S. Federal Reserve, which is expected to cut rates. The differing directions of the two central banks could lead to fluctuations in the yen and bond yields.

 A rate hike by the BOJ could strengthen the yen, while a decision to leave rates unchanged may weaken the yen, though its decline might be limited if markets expect a rate hike in January.

What Else Should Markets Watch?
Regardless of the rate decision, Governor Ueda is likely to offer guidance on future rate hikes during his post-meeting press conference. If the BOJ keeps rates unchanged, Ueda may signal a cautious stance to prevent a sharp yen decline.

On the other hand, if rates are raised, Ueda may emphasize a measured approach to further tightening. Additionally, the BOJ will release its review of unconventional monetary easing tools used in its long battle with deflation.

This review is seen as a symbolic step toward ending its massive stimulus policies, concluding that interest rate cuts are more effective than unconventional measures like asset-buying programs.

What Happens Next?

If the BOJ raises rates, it is unlikely to act again until April, when it will release updated quarterly projections. If the BOJ holds rates steady, the focus will shift to key data and events leading up to the January meeting. The BOJ may also provide hints about its policy intentions during public appearances by Ueda and Deputy Governor Ryozo Himino.

Additionally, the BOJ's quarterly report on regional economies, expected before the January meeting, will provide insight into the extent of wage increases across the country.

 

 

 

 

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.