Bank of Japan preview: hawkish hold or dovish hike? BoJ’s December dilemma

Bank of Japan's December monetary meeting

The Bank of Japan (BoJ) is set to hold its monetary meeting on 18–19 December 2024.

BoJ Governor's remarks add to market speculation

Expectations are for the BoJ to maintain its short-term interest rate at 0.25% next week, marking the fourth consecutive meeting with no change. However, the central bank’s current stance of inaction is unlikely to persist, with any rate hold expected to come with strong forward guidance for a potential January hike. Recent remarks from BoJ Governor Kazuo Ueda, suggesting that the timing of the next rate hike is "approaching," imply that policymakers are actively considering another increase.

While a December rate hike remains possible, the meeting will be a ‘live’ one. Follow-up comments from the BoJ Governor have slightly tempered expectations for an imminent move. His confidence in a December hike has been affected by the uncertainty surrounding upcoming tariffs announced by Trump, where any growth shock remains difficult to quantify at this stage.

BoJ Governor Kazuo Ueda

Strengthening yen reduces urgency for action

Over the past month, there has been some strengthening in the Japanese yen. This has softened the risks of a weaker yen pushing inflation higher, suggesting that the BoJ may feel less urgency to act immediately. The December BoJ meeting will likely serve as a key guidepost for markets, with attention shifting towards the probability of a January rate hike and the central bank's response to evolving global economic conditions.

Inflation dynamics suggests conditions ripe for another rate hike

In October, Japan’s base salary increased at a 32-year-high pace of 2.7%, offering significant momentum for inflation progress. This aligns with the Bank of Japan’s (BoJ) fiscal year 2024 (FY2024) projections, providing reassurances of the ‘sustained wages-driven inflation’ policymakers are seeking.

Tokyo CPI highlights rising inflation pressures

For November, Japan’s Tokyo consumer price index (CPI) revealed accelerating pricing pressures. Headline inflation rose to 2.6% year-on-year, compared to 1.8% in the prior month. Core inflation also increased to 2.2% from 1.8%. While part of the rise in core CPI reflects the phase-out of utility subsidies, underlying pricing pressures, such as service prices, indicate broadening inflationary trends. These developments are likely to keep the BoJ on its path towards monetary policy normalisation.

Growth resilience supports further hikes

Economic conditions have shown resilience, making the balance of risks between inflation and growth more manageable. Japan’s third-quarter (Q3) annualised real gross domestic product (GDP) exceeded expectations, rising by 1.2%. This marks the second consecutive quarter of growth, underscoring a moderate recovery path and bolstering the BoJ's case for further tightening.

Hawkish hold or dovish hike?

Next week, any Bank of Japan (BoJ) rate decision will need to be closely tied to its forward guidance. The debate centres on whether it will be a “hawkish hold” or a “dovish hike.” After facing criticism for a lack of communication during its July rate hike, the BoJ may use this opportunity to better prepare markets for a potential January move if it opts for inaction.

Balancing surprises with dovish rhetoric

A rate hike next week, while unexpected, could be accompanied by dovish rhetoric to temper market reactions. This strategy would aim to prevent significant overreaction in the Nikkei 225 index and the Japanese yen, similar to what was observed in July 2024. In the past, the BoJ adjusted its yield curve control (YCC) policy during periods of lower market liquidity, such as December 2022, taking advantage of seasonal conditions and less-active speculators to manage potential market volatility.

The BoJ’s upcoming decision may hinge on its priorities: whether to focus on clear communication to avoid market surprises or to leverage the seasonal window to manage volatility more effectively. Either way, its forward guidance will remain a critical tool in navigating market expectations.

USD/JPY technical analysis

After retreating from its November 2024 high, the USD/JPY has bounced slightly off the lower channel trendline near the 149.16 level. However, buyers lack strong conviction, as several resistance levels loom, including the 200-day moving average (MA) and an upward trendline resistance. The recent formation of a lower high adds to concerns of a potential bearish trend reversal.

Conviction for sellers may emerge if the lower channel trendline breaks, potentially paving the way for USD/JPY to decline toward the 145.00 level. This would confirm a more bearish outlook and could signal a reversal of the broader upward trend. On the upside, immediate resistance lies at the 152.92 level, where the broader upward trendline stands. A break above this level could open the path toward the November high of 156.74, reaffirming the bullish trend and signalling renewed buying momentum.

USD/JPY daily chart

Japan 225 technical analysis

The Nikkei 225 index has been trading within an ascending triangle pattern since September 2024, with recent price action testing the upper triangle resistance at the critical psychological 40,000 level. A decisive break above this level could attract buyers, invalidating the broader diamond top formation and potentially paving the way for a retest of its July 2024 high at 42,400.

On the downside, failure to break out of the ascending triangle could point to a near-term retracement. This scenario may see the index move back toward the lower triangle trendline at the 38,600 level, potentially forming another higher low within the pattern.

Japan 225 daily chart