Bank of Japan's Interest Rate Outlook

The Bank of Japan (BOJ) is likely to maintain its current interest rates at next week's policy meeting. Officials are taking time to evaluate global risks and the 2024 wage growth outlook, according to Reuters sources.

While some policymakers feel conditions for a rate hike may be present, others prefer to wait for more data to determine if wage increases will translate into sustained, inflation-driven price rises. This cautious approach diminishes the possibility of a December rate hike but enhances the likelihood of action in the BOJ’s January or March meetings.

The BOJ's decision, scheduled for December 18-19, will follow a meeting of the U.S. Federal Reserve. Should the Fed unexpectedly maintain steady rates and consequently strengthen the dollar, the BOJ might respond to potential yen depreciation.

BOJ officials remain cautious due to a lack of significant inflationary pressure and government advisories against premature rate increases. After raising rates to 0.25% in July, following the end of its negative interest rate policy, the central bank expressed optimism about Japan’s modest economic growth and consistent wage increases, but is hesitant to act too quickly. They aim to avoid signaling urgency, especially as the yen's recent increase has lessened import price pressures.

Next year’s corporate wage negotiations are expected to be closely monitored, and the January 23-24 meeting could provide greater insight into future rate strategies.

Moreover, uncertainty regarding U.S. President-elect Donald Trump's economic policies adds an additional layer of caution to BOJ's decision-making.

Currently, markets reflect a less than 30% probability of a December rate increase, contrasting with over half of the economists polled by Reuters who predict a rate hike next week. Approximately 90% anticipate that by the end of March, the BOJ will raise rates to 0.5%.