Bank of Japan Eyes Rate Hike Amidst Market Uncertainty

Tokyo, Japan - Bank of Japan (BOJ) Governor Kazuo Ueda is poised to assess the necessity of raising interest rates on Friday, amid mounting expectations for a hike. However, potential market turbulence stemming from Donald Trump's inauguration as US President could influence the BOJ's decision.

Global Context

While central banks worldwide focus on cutting rates, the BOJ remains on a tightening path to normalize monetary policy. After years of weak inflation and sluggish growth, Japan appears on the cusp of achieving price stability with robust wage growth. This has prompted the BOJ to consider raising borrowing costs towards levels seen in other developed economies.

A recent Bloomberg survey indicates that 90% of economists anticipate an increase in rates from 0.25%, and about three-quarters expect action this week. Overnight swaps on Friday briefly reflected a near-certainty of a January rate hike among traders.

BOJ Officials' Perspective

BOJ officials reportedly view a rate increase as likely, assuming Trump's actions do not trigger immediate negative shocks. They cite improving price forecasts and strong wage growth as supporting factors for a move.

Factors Influencing the Decision

* Economic Conditions: Stable inflation and solid wage growth warrant a rate increase.
* Yen Valuation: A rate hike would narrow the gap with US rates, potentially strengthening the yen.
* Potential Market Turbulence: Trump's inauguration could create market volatility, prompting the BOJ to delay its decision.
* Domestic Political Considerations: Prime Minister Shigeru Ishiba may not pass the annual budget without support from opposition parties wary of a rate hike before March.

Communication and Expectations

BOJ Governor Ueda and his deputy, Ryozo Himino, have hinted at considering the need for raising rates at the upcoming meeting. Analysts interpret these comments as indicating potential action, particularly given the BOJ's efforts to improve communication clarity. The BOJ will face scrutiny if it does not follow through, given the high expectations.

Global Outlook

Trump's inauguration will set the tone for financial markets, overshadowing the World Economic Forum in Davos. Purchasing manager indexes for January will also be closely watched globally.

Specific Economic Updates

* United States: Trump's inaugural address and executive orders, existing-home sales, and consumer sentiment data.
* Canada: Cabinet retreat, race for next prime minister, Bank of Canada surveys, and inflation data.
* Asia: BOJ rate decision, inflation figures, Monetary Authority of Singapore meeting, Malaysia's central bank policy decision, New Zealand inflation report, South Korea's consumer confidence and GDP estimates, PMI data for India and Australia.
* Europe: Davos gathering, European Central Bank President Lagarde's attendance, UK Chancellor Rachel Reeves' comments, wage data.
* Middle East, Africa: South Africa's inflation data, monetary policy decisions in Angola, Norway, Turkey, and Ukraine.
* Latin America: Inflation data for Brazil and Mexico, economic activity data for Mexico, Argentina, and Colombia.