A man walks past the Bank of Japan (BoJ) headquarters in Tokyo on October 30, 2024. (Photo by Yuichi YAMAZAKI/ AFP)
Tokyo: The Bank of Japan (BoJ) is set to discuss its rate hike path at this week’s policy meeting, with officials holding the view that there is limited urgency to act even though the next increase in borrowing costs is coming closer.
BoJ officials see little cost to waiting before raising interest rates, people familiar with the matter told Bloomberg earlier this month. That report pushed the yen to its weakest level since November on bets the BoJ will hold, while underscoring the vulnerability of the currency to further declines.
While traders now see a less than 20% chance of action this time, few are letting their guards down given the BoJ’s history with surprises.
BoJ officials are open to a December hike depending on data and market developments, and some are not against an increase at this meeting if it is proposed, the people said, reflecting how much they are nearing a third rate hike under governor Kazuo Ueda.
“The BoJ is coming closer to a rate hike,” said Izuru Kato, chief economist at Totan Research and a veteran BoJ watcher. “My view is that they will hold in December and raise in January.”
While recent data points to the economy and prices coming in line with BoJ projections – a prerequisite for hiking rates – Ueda also has to contend with a market that is now broadly expecting a hold, and the spectre of July.
After the BoJ raised rates in the summer, turmoil followed in the global markets, and the central bank came under fire for lack of clear communication.
Risk factors also include domestic politics, and the fate of the yen.
The central bank concludes a two-day gathering on Dec 19, several hours after the US Federal Reserve (Fed) is expected to deliver another 25 basis point cut.
Any hawkishness in the Fed outlook, combined with further dovishness from the BoJ, would likely weigh on the Japanese currency.
BoJ officials will make a final decision only after carefully assessing data and financial markets, the people said.
Given there’s little prospect of the yen plunging with the Fed’s likely cut, the BoJ has time to keep examining data, according to analysts.
“There is no urgency for a rate hike at this meeting with no strong wind blowing in that direction,” said Shotaro Mori, senior economist at SBI Shinsei Bank. “I see a high chance of a January rate hike.”
Overnight-indexed swaps signal a 15% probability of an interest-rate hike next week, significantly down from 66% at the end of November.
Swaps fully price in the next policy tightening by the end of May.
At the same time, economist opinions are split with 44% of 52 expecting a hike this week, while 52% said it’s happening next month, according to a Bloomberg survey released last week.
Ueda and his fellow board members have repeatedly said that the bank will raise rates if their economic outlook is realised.
They have plenty of data to show that, given the consistent underlying strength in recent economic indicators, including growth being revised up in the third quarter. Some 86% of economists said economic conditions justify a rate hike this month.
Whatever the outcome, Ueda’s post-meeting press conference will draw strong interest from market participants.
If the BoJ forgoes a rate hike, the key focus will be on any signals of a rate hike in January, or even beyond. — Bloomberg
