The Bank of Japan (BOJ) remains cautious about the timing of its next interest rate hike, with December not a certainty due to weak consumption, Governor Kazuo Ueda’s prudent decision-making style, and concerns surrounding U.S. economic policy under a potential second Trump presidency.
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While Governor Ueda hinted at the possibility of a December rate hike in a recent interview with the Nikkei newspaper, he also acknowledged uncertainties in the U.S. economy. This lack of a clear commitment has led to fluctuating market expectations, with predictions shifting between December and January.
Having guided Japan through a decade of ultra-loose monetary policy, the BOJ is hesitant to act prematurely, particularly after a surprise rate hike in July triggered significant volatility in currency, bond, and stock markets. Geopolitical tensions and uncertainty surrounding U.S. President-elect Donald Trump’s policies further encourage a cautious approach.
Market expectations for a December rate hike, which initially surged to around 60% following the release of strong inflation data, have since declined below 40% amidst renewed doubts fueled by media reports suggesting a more cautious BOJ stance. Adding to the uncertainty, dovish BOJ board member Toyoaki Nakamura did not dismiss a December hike but emphasized a data-dependent approach.
Internal Deliberations and Ueda’s Approach
Sources familiar with the BOJ’s thinking indicate that while the central bank aims to raise rates by around March, it prefers to maintain flexibility regarding the precise timing. “December will be a live meeting, as with any other in the coming months,” one source stated, emphasizing that the final decision rests with the board.
Ueda’s analytical decision-making style, characterized by a thorough assessment of data before reaching a conclusion, further contributes to the uncertainty. “He operates with an academic mindset,” a source commented, highlighting Ueda’s tendency to avoid premature signals. Following the December 18-19 meeting, the BOJ has scheduled rate reviews for January 23-24 and March 18-19.
Conflicting Economic Signals
Within the BOJ, there’s growing confidence in sustained wage growth, which could prompt companies to raise prices, fulfilling a key condition for another rate hike. Regular pay has been increasing at an annual rate of 2.5-3%, and Japan’s largest labor union is pushing for wage hikes of at least 5% in 2025. Inflation remains above the BOJ’s 2% target, driven by rising labor costs and service prices.
However, other economic indicators present a less optimistic outlook. Household spending declined for the third consecutive month in October due to rising living costs, factory output remains stagnant, and exports to the U.S., Japan’s largest export market, slumped in October. Despite increased capital expenditure in the third quarter, recurring profits fell by 3.3% year-on-year due to intensified global competition.
Data Dependency and External Factors
Having already reduced stimulus twice this year—ending negative interest rates in March and raising short-term borrowing costs to 0.25% in July—the BOJ, under Ueda’s leadership, maintains a data-driven approach to policy adjustments. Each economic indicator leading up to the December meeting will likely be closely scrutinized by the market. Revised third-quarter GDP data is due on Monday, followed by the BOJ’s quarterly “tankan” business survey on December 13.
Furthermore, potential tariff increases threatened by Trump introduce renewed global economic uncertainty, a factor Ueda specifically highlighted in his Nikkei interview. With the yen retreating from its three-decade low against the dollar and inflation showing no signs of significant overshooting, the BOJ faces less immediate pressure to raise rates.
Conclusion: A Strategic Balancing Act
“The BOJ is not in a significant rush, as long as a hike can be implemented by March,” noted Mari Iwashita, chief market economist at Daiwa Securities. The central bank’s primary challenge lies in strategically selecting the most opportune timing for the next rate hike from the three upcoming meetings. The decision hinges on a complex interplay of domestic economic data, global uncertainties, and the BOJ’s commitment to a gradual and measured approach to monetary policy normalization.
