BOJ December Decision Outlook: Divided Opinions on a Rate Hike and a Rate Consistency

 

The Bank of Japan (BOJ) will end its two-day meeting on Thursday (Dec. 19). Markets are divided on whether the bank will announce a rate hike after the meeting.

 

The BOJ has raised its benchmark short-term interest rate twice so far in 2024, closing the long-term negative rate. The shift is seen as a virtuous cycle of wage increase and improved inflation.

 

After increasing the rate to 0.25% in July, the central bank left it unchanged, partly due to constant signs of soft domestic growth. The latest gross domestic product data showed that Japan's economic growth fell short of expectations in the third quarter and declined from the previous quarter.

 

According to a Reuters survey, the central bank was more likely to maintain the rate with signs of a hike in early 2025, though BOJ Governor Kazuo Ueda hinted at an imminent hike in November.

 

Analysts held different opinions on whether the BOJ would raise rates by 25 basis points in December.

 

In a Reuters poll, analysts favored the unchanged rate in December and expected the BOJ to raise rates in March 2025 by another 25 basis points. These analysts said rising uncertainty over Japan's economy and upcoming potential U.S. tariffs on China could limit the BOJ's decision.

 

BofA analysts said it would be more natural for the BOJ to raise rates next January, despite the favorable factors in December. They explained that the BOJ was unlikely to repeat its July rate hike amid weakening liquidity at year-end and criticism about the July hike.

 

Because of the favorable factors, some analysts still predicted a rate hike in December. They said that with wages, private consumption, and inflation improving, the BOJ could raise rates by 25 basis points, further reinforcing the virtuous cycle.

 

ANZ analysts held this view because of growing business activity, a contracting labor market, and forecasts for 2025's wage surge. However, they emphasized that a rate hike was uncertain with policy uncertainty rising.

 

Japanese equities have been range-bound, with the Nikkei 225 flat so far this week, due to disagreements over the rate decision. Japanese stocks could rise if the BOJ sustains interest rates and fall if rates are raised.

 

The yen is currently stable with USD/JPY steady between 153 and 154 yen. If rates are raised, the yen could strengthen significantly. The unchanged rate could shortly place more pressure on the yen.

 

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