Will the Yen See Another Rate Hike Next January?

On the 19th of this month, the Bank of Japan (BoJ) made a clear decision, maintaining its interest rates with a notable 8-1 vote, marking the third consecutive pause in their tightening cycleFollowing this announcement, the yen sank below 155 against the dollar, while the Nikkei 225 futures experienced a sharp uptick of over 1%, partially recovering previous losses.

The central bank provided insights into its economic outlook, suggesting that the core Consumer Price Index (CPI) is expected to gradually increase and currently hovers within the range of 2% to 2.5%. Furthermore, the bank anticipates that the economic growth will remain above its potential levelHowever, the uncertainty surrounding Japan's economic and price outlook remains significantThey project that over the latter half of the three-year forecast period that extends until the fiscal year 2026, inflation levels may align closely with the bank's price target, although careful scrutiny of foreign exchange rates, market trends, and their impacts on Japan's economy and pricing will be essential.

Additionally, the BoJ underscored that changes in corporate wages and pricing behavior suggest that fluctuations in foreign exchange rates might exert a greater influence on inflation than in the past

Moreover, the interactions between monetary policy and its effects on the stock market and exchange rates carry a considerable degree of uncertainty.

The central bank also released a review of its monetary easing policies, advocating for the continuation of monetary policy aimed at sustainably achieving the 2% price stability targetThey emphasized the necessity of not dismissing any specific measures when considering future monetary policiesThe quantification of the effectiveness of these easing measures compared to conventional monetary policies remains uncertain; while they have had some impact on inflation expectations, it has not been sufficient for anchoring inflation firmly at the 2% levelSince 2016, long-term interest rates have decreased by approximately one percentage pointThe effects of large-scale monetary easing on GDP are estimated to range between +1.3% and +1.8%, and its impact on the CPI lies between +0.5 and +0.7 percentage points.

When considering the political implications, Taro Kimura, an economist with Bloomberg Economic Research, noted that any decision to raise rates could impose significant political costs on the BoJ, potentially frustrating both ruling and opposition party legislators

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In determining the opportune moment for a rate hike, the bank cannot overlook the political landscapeAny increase in borrowing costs this week would likely displease lawmakers, particularly as a government stimulus package was just approved by Congress on Tuesday.

Opposition leader Yuichiro Tamaki expressed concerns regarding the inadequacy of wage growth to match the rising cost of livingMeanwhile, former Defense Minister Shigeru Ishiba, following a meeting with BoJ Governor Kazuo Ueda earlier in October, commented that the current situation is ill-suited for another rate increase; this marked an unusual public statement from him concerning monetary policyKimura interpreted Ishiba's comments as an indication of his support for the BoJ's cautious approach in timing policy adjustmentsA rate hike soon after his statements could detrimentally affect his public image.

Looking ahead, Kimura anticipates that the BoJ may take action at its meeting scheduled for January 24. This date is expected to shift lawmakers' focus from narrow borrowing costs to broader concerns surrounding the rising costs of consumer goods, potentially providing the BoJ with greater latitude to act

He emphasized that the current economic environment appears favorable for the BoJ in pursuing policy normalizationData on wages and prices increasingly indicate that achieving the 2% inflation target is becoming more plausible.

Furthermore, Kimura stated, "We expect Ueda to hint at potential actions in the January meeting during today's press conferenceThe rationale is substantial: first, the latest CPI report and quarterly Tankan survey have clearly indicated significant inflationary pressures, coupled with early signs that next year’s spring labor negotiations may lead to substantial wage hikes, suggesting that conditions for the BoJ to resume tightening are ripeAdditionally, the weakening yen is amplifying inflation pressures, increasing the risks that inflation may exceed the bank's targetUeda is likely to indicate a consideration of further rate hikes to manage the currency's trajectory

Lastly, recent market volatility—especially the yen's surge in early August and the market disturbances following July's BoJ rate hike—reminds the bank of the heightened investor sensitivity to official communications close to potential policy movesThis week’s pause provides a valuable opportunity for the BoJ to guide the market in preparation for a January hike; moreover, the bank will release its next quarterly projections in January, allowing it to provide a robust justification for rate increases by delivering a deeper analysis of the U.Seconomy's status, which might yield a stronger conclusion in confidence assessmentsPreviously, the BoJ cited uncertainties surrounding the U.Seconomy since September as a cautionary reason for its conservative stance, but we believe those concerns are diminishing now.” Regarding expectations for rate hikes throughout 2025, he predicts that the BoJ will raise rates three times, each by 25 basis points, reaching a target rate of 1.0% by July.

The yen's depreciation has also prompted several analysts to suggest that although the BoJ has chosen to stand pat this time, it is less likely to postpone rate hikes beyond January