Bank of Japan interest rate meeting preview: will rates rise further?
The Bank of Japan (BoJ) faces crucial policy decisions as markets watch for signs of further monetary tightening following recent inflation data.
Bank of Japan interest rate meeting preview: a 25 basis point hike in the pipeline?
The Bank of Japan (BoJ) is set to convene its monetary policy meeting on January 23–24, 2025, amid heightened market anticipation of a potential interest rate hike.
Japan's 2024 move away from negative interest rates marked a significant policy shift, ending decades of ultra-loose monetary policy with further tightening in the frame.
Speculation of a rate increase
Market participants are increasingly expecting the BoJ to implement a 25 basis point rate hike, elevating the policy rate from 0.25% to 0.50%. This expectation follows statements from BoJ Governor Kazuo Ueda, who indicated that policymakers are considering such a move in light of updated growth and inflation forecasts.
Inflationary pressures
Recent data reveals persistent inflationary trends, with Japan's annual wholesale inflation steady at 3.8% in December 2024, driven by elevated food and fuel costs. This sustained price pressure supports the case for a potential rate hike.
Wage growth dynamics
The initiation of Japan's annual labour talks, led by Keidanren and trade unions, underscores a focus on significant wage increases. Larger corporations are expected to propose an average wage hike of 4.74% in 2025, reflecting efforts to address decades of stagnant wages amid rising inflation and labour shortages.
Potential market implications
The BoJ's communication strategy will be crucial in managing market reactions. A decision to maintain current rates could lead to an initial depreciation of the Japanese yen; however, a slightly hawkish tone from policymakers may help mitigate the yen's decline.
While expectations lean toward a 25 basis point rate hike, the BoJ's approach to communication will be essential in ensuring policy adjustments do not incite undue market volatility.
Market reaction
The Japanese yen has shown sensitivity to policy expectations, with forex trading volumes increasing around BoJ meetings. Currency pairs involving the yen could see heightened volatility around the announcement.
Bond market volatility could increase if the BoJ signals further policy adjustments.
Japanese share prices typically react strongly to monetary policy decisions.
Global markets are watching for spillover effects from any policy changes.
USD/JPY and Nikkei 225 technical analysis
USD/JPY has probably already priced in a 25 basis rate hike to 0.5% with the cross remaining within its September-to-January uptrend and bouncing off its 55-day simple moving average (SMA) at ¥154.79 offering immediate support.
USD/JPY daily candlestick chart
A rise above Monday’s high at ¥156.58 is needed for the November peak at ¥156.74 to be reached and then the current January high at ¥158.87. If bettered, the ¥160.00 region could soon be reached even if the BoJ officials might then verbally intervene.
The medium-term uptrend will remain intact while the December low at ¥148.65 underpins.
The Nikkei 225 has been trading within a relatively tight 40,398-to-37,651 sideways trading range since October 2024 and is expected to eventually break out towards the upside toward its July 2024 record high at 42,426. This will remain the case as long as the October 2024 low at 37,651 underpins.
Nikkei 225 daily candlestick chart
Were support at 37,651 to give way, the September 2024 low at 35.248 may be revisited.
Risk management is crucial given potential market reactions to policy changes.
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