Japan’s Central Bank Poised to Raise Interest Rates
The Bank of Japan is expected to increase its benchmark interest rate by 25 basis points this week, according to a survey of economists. This move would bring the key rate to 0.5%, its highest level since 2008. The majority of economists agree on the prospects of a rate hike, citing a recent shift in tone from the BOJ leadership.
A Change in Tone
Public comments from Governor Kazuo Ueda and a speech by Deputy Governor Ryozo Himino to business leaders have indicated the BOJ’s willingness to hike rates. Ueda stated that the central bank would raise rates if economic and price improvements continue, while Himino mentioned that the bank would debate raising rates at the upcoming meeting.
Economic Indicators Point to Rate Hike
Several economists point to a recent change in tone from the BOJ leadership as driving their expectations. The persistent weakness in the yen, which has drifted to 6-month lows, and a series of hotter-than-expected inflation prints for consumer, producer, and import prices, also raise the odds of monetary policy action in January.
A Virtuous Cycle
The Bank of Japan aims to ensure a “virtuous cycle” of rising prices and wages, where higher wages would fuel higher prices and consumption. This cycle is expected to lead to sustainable growth in the Japanese economy, which has been stagnant since the 1990s. Core inflation in Japan has matched or run above the BOJ’s 2% target for 32 months in a row, and 2024 saw the largest increase in the shunto wage negotiations in 33 years.
Challenges Remain
However, household expenditure data has not shown significant improvement. Household expenditure has decreased every month year on year since March 2023, barring two marginal increases in April and July 2024. A weak spending figure could mean that demand is soft, which will put a dent in the BOJ’s “virtuous cycle.”
Uncertainty Remains
Despite the expected rate hike, economists flag a key risk to this forecast: the uncertainty stemming from Donald Trump’s presidency and its potential impact on financial markets and Japan’s economy. The outcome of the upcoming meeting will be closely watched, as it may have significant implications for the Japanese economy and global markets.
Leave a Reply