Author: Leica Kihara
(Reuters) – The Bank of Japan is holding its first policy meeting of the year next week, with the outcome to be announced days after the inauguration of U.S. President-elect Donald Trump.
Here’s a guide to what to expect and why the BOJ’s rate review is important:
WHEN IS THE BOJ MEETING HELD?
The BOJ’s monetary policy committee is scheduled to meet on January 23-24. They will announce their decisions at the end of their deliberations.
The BOJ ended years of negative interest rates in March and raised its short-term policy to 0.25% in July. He has signaled a willingness to raise again if wages and prices move as predicted.
WILL BOJ INCREASE INTEREST RATES?
There is a growing belief in the BOJ that conditions are being created for another increase. The economy continues to develop moderately, and inflation has been above the target of 2% for almost three years now.
Companies continue to pass on rising raw material and labor costs to customers, suggesting the BOJ board is likely to revise its inflation forecasts in its quarterly outlook report due next week.
More importantly, there were increasing signs that companies will offer big pay increases for the third straight year in annual wage talks with unions that begin in March.
The heads of the BOJ’s regional branches said the wage increases are spreading to companies of all sizes and sectors, thus fulfilling a key prerequisite for raising interest rates.
As such, the central bank is likely to raise rates to 0.5% next week, barring a Trump-induced market shock.
WHAT HAVE THE POLICY MAKERS OF BOJ SAID SO FAR?
Markets have been closely watching the BOJ’s stance on wages and the US policy outlook, after Governor Kazuo Ueda cited uncertainty over the outlook for domestic wages and Trump’s policies as reasons for delaying a rate hike last month.
In a speech on Tuesday, Deputy Governor Ryozo Himino said wage growth was likely to remain strong this year. A day later, Ueda reiterated optimism as a sign of the BOJ’s belief that Japan is making progress towards achieving its inflation target on a sustained basis.
Both Himino and Ueda said the BOJ would discuss whether to raise rates next week, indicating a strong chance of a hike.
WHAT COULD STOP POLICY MAKERS?
With increased prospects for sustained wage growth, the only remaining obstacle to a rate hike next week would be the risk of Trump dropping a bomb and upending financial markets.
In addition to his inaugural address, Trump is expected to issue a series of executive orders when he begins his second term in the White House on Monday.
Lt. Gov. Himino said he would look for clues about the “balance and timing” of the new president’s policy moves, as well as anything Trump hasn’t flagged so far.
If Trump’s comments shock markets and send global stocks tumbling, the BOJ may prefer to hold off until markets price in the news.
HOW MIGHT THE MARKETS REACT TO A RATE INCREASE IN JAPAN?
Reduced bets on further interest rate cuts by the US central bank mean the interest rate differential between the US and Japan will remain wide, keeping the yen under downward pressure.
A rate hike by the BOJ is likely to boost the yen. But the currency’s gains could be short-lived unless Ueda makes sharp comments on the outlook in his post-meeting press briefing.
WHAT ELSE DOES THE MARKETS NEED TO WATCH OUT FOR?
The BOJ will release a quarterly outlook report with revised growth and inflation forecasts, which will show how optimistic the board is about Japan’s prospects for sustainably achieving 2% inflation. This will affect the speed of future rate increases.
Ueda may also hint at the timing and pace of further hikes in his post-meeting briefing.
The key would be the governor’s stance on Japan’s neutral rate. BOJ staff estimates show that the inflation-adjusted real neutral rate is in the range of around -1% to +0.5%. This means that if inflation were to reach the BOJ’s 2% target, it could raise its short-term rate to at least around 1% without slowing growth.
Based on the October forecast, the BOJ expects short-term rates to move closer to what it sees as neutral “in the second half of the three-year projection period” to March 2027, suggesting some time after October 2025.
While hawkish board member Naoki Tamura predicts the neutral rate will be around 1%, Ueda said it is too hard to come by credible estimates due to a lack of data.
WHAT’S NEXT?
Many analysts expect the BOJ to continue raising rates at a pace of roughly twice a year. If the BOJ raises rates next week, it could remain in a holding pattern until the second half of this year when there is more clarity on the impact of Trump’s policies.
Domestic politics also complicate the timing of the BOJ’s rate hike with upper house elections scheduled for July, where Prime Minister Shigeru Ishiba’s minority coalition may struggle to muster votes. The BOJ may prefer to avoid a policy change until the political dust settles.
