BoJ Final Policy Meeting of the Year

TOKYO (Reuters) – The Bank of Japan holds its final policy meeting for the year next week, with its decision to be announced just hours after the U.S. Federal Reserve's expected interest rate cut.

Expectations for BoJ’s Rate Review

Will the BoJ Raise Interest Rates?

The BoJ ended negative interest rates in March and raised its short-term policy target to 0.25% in July. It has signaled readiness to hike again if wages and prices move as projected.

Growing conviction within the BoJ suggests that conditions for another hike to 0.5% are falling into place, as the economy expands moderately, wages rise steadily, and inflation remains above the 2% target for over two years.

However, policymakers are in no rush due to the yen's stabilization affecting inflationary pressure and uncertainties around the incoming U.S. president's policies. The decision to hike in December or wait until Jan. 23-24 will depend on confidence that Japan can sustainably hit the 2% inflation target.

Sources indicate the BoJ leans towards keeping rates steady while examining global risks and clues for next year's wage outlook.

Comments from BoJ Policymakers

The timing for the next rate hike remains unclear. Governor Kazuo Ueda mentioned a hike is approaching without indicating it might occur this month. Dovish board member Toyoaki Nakamura surprised markets, stating he doesn't oppose hikes but insists that the decision must depend on data.

While there's an aim to hike by March, non-committal remarks suggest flexibility regarding timing.

Market Expectations

A majority of economists polled expect the BoJ to maintain steady interest rates in December, a shift from earlier predictions. Currently, markets are pricing in approximately a 20% chance of a December hike.

Potential Market Reactions

The BoJ's decision will follow the U.S. Federal Reserve’s, which is anticipated to cut rates. The differing directions of the two central banks could lead to fluctuations in the yen and bond yields.

If the BoJ raises rates, it may strengthen the yen, while keeping rates steady could weaken it, although declines may be limited if markets quickly factor in a January increase.

Future Market Guidance

Regardless of whether rates hike, Ueda is likely to provide guidance on future rate paths and triggers during the post-meeting news conference. If rates remain steady, Ueda might hint at future hikes to mitigate unwanted yen falls and clarify key considerations for timing. If rates are raised, dovish communication may follow to assure markets of cautious future actions.

Additionally, the BoJ is expected to release findings on various unconventional monetary easing tools, marking another step toward ending massive stimulus. The review will conclude that interest rate cuts are preferable to unconventional methods for combating economic stagnation.

What’s Next?

If the BoJ raises rates, it will likely remain steady until at least April when new quarterly projections through fiscal 2027 will be published. A decision to maintain rates will shift focus to key data leading up to the January meeting. Hints on policy intentions may arise during Ueda's Dec. 25 speech to Keidanren and Deputy Governor Ryozo Himino's Jan. 14 appearance. The BoJ's quarterly report on regional economies, expected before the Jan. 23-24 meeting, will provide further insight into wage trends nationwide.