(Bloomberg) -- The Bank of Japan is set to discuss whether or not an interest rate hike is warranted on Thursday, with views from officials suggesting a lean toward a hold amid growing market speculation of a January move.
Governor Kazuo Ueda’s board is expected to leave its benchmark rate unchanged at 0.25% at the end of a two-day meeting, according to traders’ views reflected in the latest overnight-indexed-swap rates. More than half of economists now predict a rate hike in January while 44% still see it coming this week, according to this month’s Bloomberg survey.
BOJ officials see little cost to waiting before raising borrowing costs, people familiar with the matter told Bloomberg earlier this month. The board’s decision, which usually comes around noon, is set to end weeks of intense guessing over whether the central bank may move this week. At one point traders saw a two-thirds likelihood of a policy change.
“The BOJ isn’t in a hurry for a rate hike,” said Mari Iwashita, executive economist at Daiwa Securities. “Even though the economy and inflation are moving as expected, I’ve felt no strong sense from the BOJ they’ll move this time.”
Still, well aware of the central bank’s history with surprises, many investors are on guard especially after its July rate hike set the stage for a global market rout. Some BOJ officials are not against a rate increase at this gathering if it is proposed, according to the people Bloomberg talked to. That points to a potential shift in voting behavior. In January 2007, three board members proposed a rate hike, laying the ground for the following month’s increase.
The BOJ decision takes place just several hours after the Federal Reserve’s expected rate cut. The yen has weakened against the dollar in the past two weeks as more investors have priced in no BOJ hike this month. That said, the bank will probably keep suggesting there will be borrowing cost increases down the road to avoid giving too much momentum to the yen’s fall.
Following the policy statement release, the focus will turn to Ueda’s press conference which usually starts at 3:30 p.m. Provided the rate is unchanged, the key question would be how far the BOJ is to another hike. With the January policy decision scheduled four days after Donald Trump takes over the White House, Ueda will likely want to avoid setting his third hike in stone given the level of uncertainty ahead.
What Bloomberg Economics Says...
“The economic backdrop looks conducive for the BOJ to normalize its policy. Wage and price data suggest its 2% inflation target is becoming increasingly secure. We expect Ueda to hint at his press conference that a January move is on the table.”
Taro Kimura, economist
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Here is what to watch for
- In the event of no hike, the focus will be on any signals from Ueda on the distance to the next hike. If signs point to a higher chance for a shift in March or later, that would likely weaken the yen given most BOJ watchers expect the move by January.
- Ueda has said Japan’s wage trend and the US economy are on top of his watch list. Clear optimism or pessimism on those fronts could be a useful measure of his cautiousness.
- A rate hike decision at this meeting is likely to risk another shock to global markets amid relatively thin year-end trading, and a jolt to the yen. A move would signal Ueda’s strong will to keep normalizing policy when he can, and likely bring forward market expectations of an additional hike to around spring, at the cost of harsh criticism over his communication.
- Investors will be watching Ueda’s remarks on potential impacts from Japan’s unstable politics as some analysts cite it as a key reason to hold this month. Prime Minister Shigeru Ishiba’s minority government is still debating the nation’s regular budget and trying to hash out a tax deal with an opposition party, complicating Ueda’s task as some lawmakers have warned against any hasty change to monetary policy.
- The BOJ will release the result of its broad review of the last quarter century of monetary policy which Ueda launched last year. That’s unlikely to be a factor to move financial markets as it’s largely seen as a reference point that could be used when the bank needs to implement monetary stimulus.
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