Bank of Japan Meeting Update

The Bank of Japan is set to conclude a two-day meeting on Thursday, with markets divided on the possibility of further interest rate hikes following a historical policy shift earlier this year.

Current Interest Rate Trends

The BOJ has increased its benchmark short-term rate twice in 2024, marking the end of nearly a decade of negative rates in response to a perceived “virtuous cycle” of wage growth and improved inflation. The benchmark rate rose to 0.25% after the last hike in July, but rates have remained unchanged amid signs of slowing economic growth and heightened political uncertainty in Japan.

Economic Performance Concerns

Recent wage growth and private consumption have slowed, causing doubts about the BOJ's ability to continue rate hikes. Notably, the latest GDP data revealed that the Japanese economy grew less than expected in the third quarter, with a sharp slowdown from the previous quarter.

Analysts' Predictions

Analysts are divided on whether the BOJ will raise rates by 25 basis points in its final meeting of the year. A Reuters report indicates that the central bank might favor holding rates and signaling a potential hike in early 2025 instead. A poll showed that many analysts expect a December hold, although there could be another 25 bps increase by the end of March 2025.

Governor’s Signals

BOJ Governor Kazuo Ueda warned in November against keeping borrowing costs too low, suggesting that a rate hike is near, yet he also expressed caution regarding the economy's performance.

Holding Rates vs. Hiking

Case for a Hold

Analysts favoring a hold cite economic uncertainties that could restrict the BOJ's decisions. Concerns about U.S. policy changes under President Trump, who plans to impose trade tariffs on major U.S. trading partners, particularly China, may further motivate the BOJ to remain cautious. BofA analysts suggested that while December could see a hike, January might be the more suitable time for an increase.

Case for a Hike

Conversely, those advocating for a hike believe the BOJ might raise rates by 25 bps due to improving wages, private consumption, and inflation. ANZ analysts anticipate better business activity and sentiment could prompt a preemptive rate hike. However, they acknowledge uncertainties surrounding domestic and foreign policies.

Market Reactions

Japanese stocks have been rangebound amid uncertainty over the BOJ's decision, with the Nikkei 225 showing minimal movement. A rate hold could boost stocks, while a hike might lead to declines. The yen remains stable, trading between 153 and 154 yen against the dollar, with potential fluctuations depending on the BOJ's decision. A hike could strengthen the yen, reminiscent of its reaction to July's unexpected rate increase, though most of those gains have been lost since.

A hold is likely to apply near-term pressure on the yen.