Bank of Japan’s Upcoming Policy Meeting

By Leika Kihara
(Reuters) – The Bank of Japan (BOJ) will hold its first policy meeting of the year on January 23-24. The outcome will be announced shortly after the inauguration of U.S. President-elect Donald Trump.

Key Expectations

This article serves as a guide on the BOJ’s rate review:

Meeting Schedule

The BOJ board responsible for monetary policy will convene on January 23-24. Decisions will be announced following their discussions.

Interest Rate Outlook

The BOJ ended negative interest rates in March and increased its short-term policy target to 0.25% in July. A further rate hike is possible if wage and price forecasts materialize as expected.

Likelihood of a Rate Increase

There is a growing belief within the BOJ that conditions are aligning for another rate increase. The economy has been expanding moderately, and inflation has exceeded the 2% target for nearly three years. Companies are passing on rising costs, indicating that the BOJ might revise its inflation forecasts upward in the upcoming outlook report.

Notably, annual wage negotiations in March may lead to significant pay hikes, supported by the BOJ’s regional branch managers who report broad wage increases across sectors.

Thus, a rise in rates to 0.5% is likely, unless impacted by market reactions to Trump’s policies.

Views from Policymakers

Market reactions to the BOJ’s stance on wages and the U.S. policy outlook have been under scrutiny. Governor Kazuo Ueda previously expressed caution about domestic wage trends and Trump’s policies. However, Deputy Governor Ryozo Himino expressed confidence in strong wage growth this year.

Both officials indicate a strong chance of deliberating a rate hike in their next meeting.

Potential Obstacles

The primary concern holding the BOJ back from raising rates remains the risk of market turmoil triggered by Trump’s comments or policies. With Trump’s inauguration set to influence financial markets, the BOJ may prefer to wait for stabilization before taking action.

Market Reactions to Rate Changes

As the likelihood of U.S. Federal Reserve rate cuts diminishes, the interest rate gap between the U.S. and Japan will heighten, likely putting downward pressure on the yen. A BOJ rate hike could initially strengthen the yen, but gains may be short-lived depending on Ueda’s comments post-meeting.

Outlook Report Insights

The BOJ will publish a quarterly outlook report, offering revised growth and inflation forecasts, which are indicative of the bank’s confidence in maintaining a sustainable 2% inflation target. Ueda’s insights during the post-meeting briefing could provide guidance on future rate hikes.

Looking Ahead

Analysts predict the BOJ may increase rates approximately twice per year. If a hike occurs next week, the BOJ might adopt a cautious approach until later in the year, awaiting clarity on Trump’s policy impacts. Additionally, their rate decisions could be influenced by impending political events, such as an upper house election in July, which may complicate the BOJ’s position.