Bank of Japan (BoJ) preview: Timing of next hike split between December and January

Timing of Japan's next rate hike split between December and January

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

Expectations are for the BoJ to maintain its short-term interest rate at 0.25% next week for the fourth consecutive meeting. However, the central bank’s inaction is unlikely to last, with any upcoming rate hold likely to be coupled with strong forward guidance for a January hike. Recent remarks from BoJ Governor Kazuo Ueda that the timing of the next rate hike is "approaching" seems to imply that policymakers have been actively considering another increase.

While the chances for a December rate hike are still open, the meeting will be a ‘live’ one, given that follow-up comments from the BoJ Governor seem to be reeling back on an imminent move. His confidence for a December move has been somewhat tempered down by the uncertainty around upcoming Trump’s tariffs, in which any growth shock remains hard to quantify at this stage.

There has also been some strengthening in the Japanese yen over the past month, with the softer risks of the weaker yen pushing up inflation suggesting less urgency to act for now.

Inflation dynamics suggests conditions ripe for another rate hike

Nevertheless, a 32-year-high pace for Japan's base salary in October (2.7%), alongside further inflation progress towards the BoJ’s FY2024 projections, should offer the reassurances for the ‘sustained wages-driven inflation’ policymakers are looking for.

For November, the Japan’s Tokyo consumer price index (CPI) showed pricing pressures picking up the pace, with headline inflation rising to 2.6% year-on-year (1.8% prior) while the core aspect rose to 2.2% (1.8% prior). While part of the increase in core CPI was due to a phase-out of utility subsidies, broadening of underlying pricing pressures such as service prices should keep the BoJ firmly on its normalisation path.

The balance of risks between inflation and growth was also made easier, with economic conditions showing some resilience to be able to weather further hikes. Japan’s 3Q annualised real gross domestic product (GDP) came in better than expected (+1.2%), with its second consecutive quarter of growth pointing to a moderate recovery path.

Hawkish hold or dovish hike?

Next week, any BoJ rate decision will have to be married with its forward guidance, leaving the debate to revolve around whether it will be a “hawkish hold” or a “dovish hike”. Given that the BoJ was previously criticised for a lack of communication during its July rate hike, any inaction this time round may see policymakers better prepare markets for a January move.

Conversely, a rate hike next week may come with some surprise, but policymakers will likely counterbalance it with some dovish rhetoric to mitigate any overreaction in the Nikkei and the Japanese yen, as seen in July 2024. Notably, the central bank previously adjusted its yield curve control (YCC) policy in December 2022, possibly leveraging on the lower market liquidity and less-active speculators to manage any exaggerated market moves.

Therefore, the upcoming decision may hinge on whether the BoJ prioritises clear communication or opts to capitalise on this seasonal window to better manage potential volatility.

USD/JPY: Near-term rising channel, but more conviction needed

After easing off its November 2024 high, the USD/JPY manages to bounce off slightly from a lower channel trendline at the 149.16 level. However, more conviction for buyers are still needed, as a series of resistance may still stand in the way, which comprises of its 200-day moving average (MA) and an upward trendline resistance. Recent formation of a new lower high also raises the risk of a bearish trend reversal.

Conviction for shorts may come from any breakdown of the lower channel trendline, which could pave the way for the USD/JPY to head towards the 145.00 level. On the upside, immediate resistance to overcome may be at the 152.92 level, where the broader upward trendline stands, followed by its November high at the 156.74 level.

Japan 225: Near-term resistance at ascending triangle upper trendline

The Nikkei 225 index has been trading within an ascending triangle pattern since September this year, with recent price action bringing the index back to retest its upper triangle resistance at the key psychological 40,000 level. Any decisive break above the 40,000 level may be on watch for buyers, as it will invalidate a broader diamond top formation and may pave the way for the index to retest the its July 2024 high at the 42,400 level.

On the downside, any failure to break out from the ascending triangle could suggest a near-term retracement back towards the lower triangle trendline at the 38,600 level for another formation of a higher low.