Bank of Japan Expected to Raise Interest Rates Amid Heightened Expectations and Market Jitter Concerns
On Friday, Bank of Japan Governor Kazuo Ueda will assess the need for an interest rate increase amidst heightened market expectations. The move is anticipated unless a market shock occurs due to Donald Trump's first actions in the White House.
While central banks worldwide focus on reducing rates, Ueda and his board continue to explore the opposite direction, gradually aligning Japan with conventional monetary policy practices. After years of sluggish growth and low inflation, Japan appears poised to achieve stable price levels and robust wage growth, allowing the BOJ to consider raising borrowing costs comparable to other major economies.
A Bloomberg survey of economists this month revealed that 90% believe conditions warrant an increase from the current 0.25%. Approximately three-quarters of the economists surveyed anticipate a rate hike this week. Overnight swaps briefly indicated a fully priced January hike among traders.
BOJ officials also perceive a high likelihood of a rate increase, provided Trump's actions do not generate significant immediate negative surprises, as reported by Bloomberg on Thursday, citing familiar sources. A potential upward revision of price forecasts and strong wage growth expectations support a rate hike.
Expectations of a looming hike intensified after both Ueda and his deputy, Ryozo Himino, indicated that they would consider the need for higher borrowing costs at the upcoming meeting. Some BOJ observers interpret these comments as a hint of imminent action, as the central bank leadership aims to improve communication clarity. Analysts have cited the lack of messaging preceding the July interest rate hike as a contributing factor to the global market meltdown in the summer.
Economists point to the yen as another factor. The currency has fluctuated near 160 to the dollar, prompting billions in market intervention to support the yen last year. A rate hike would narrow the interest rate gap between the US and Japan, likely boosting the currency.
"The most recent signal of rate hikes from BOJ officials is propping up the yen. In the longer run, a rise in Japan's interest rates and stronger growth may also squash the yen-selling narrative," says Taro Kimura, senior Japan economist at Bloomberg Economics.
Factors that could deter Ueda include potential market turbulence sparked by Trump, which might lead the BOJ to delay a rate increase. Tariff threats are among the primary concerns for all major US trading partners, including Japan, as the president-elect is expected to issue numerous executive orders on the first day of his second term.
Closer to home, more data on annual wage deals will become available in March, potentially providing Ueda with further clarity on wage trends supporting stable price growth. Prime Minister Shigeru Ishiba, meanwhile, faces uncertainty in passing the annual budget without support from opposition parties that oppose a rate hike before March.
Despite the cautious considerations, the BOJ's recent signals and the high expectations for a rate hike raise questions about the central bank's communication strategy should it fail to follow through.
Elsewhere, Trump's inauguration will overshadow the World Economic Forum in Davos, where he is expected to deliver a virtual address on Thursday. Global manufacturing and services surveys will also be closely monitored in January.