Bank of Japan (BoJ) preview: ‘Live’ meeting amid rate hike speculation

Mounting bets for a January rate hike

The Bank of Japan (BoJ) is set to hold their monetary meeting across 23 – 24 January 2025.

Market expectations are increasingly focused on a 25 basis point (bp) rate hike by the BoJ at its upcoming meeting, potentially raising the policy rate from 0.25% to 0.50% after a four-meeting pause. The renewed speculation stems from comments made by BoJ Governor Kazuo Ueda, who indicated that policymakers will deliberate on the possibility of a hike, with some reference to the central bank's updated quarterly growth and inflation forecasts.

This will position the upcoming meeting as a ‘live’ one. However, with criticism over past communication missteps—particularly during the July 2024 policy adjustment—BoJ officials will have to navigate carefully so as to avoid undesired market volatility. A surprise decision to hold rates steady at the upcoming meeting could trigger an initial sell-off in the Japanese yen, but that could be counterbalanced by a slightly hawkish tone from policymakers to mitigate the yen's decline.

Inflation dynamics support an impending hike, outlook report on watch

The basis behind a potential rate move may stem from accelerating December Tokyo consumer inflation since October 2024. The headline Tokyo consumer price index (CPI) reached 3%—its highest level since October 2023—while the core CPI hit a four-month high at 2.4%.

Strengthening underlying price pressures in the Tokyo inflation data could feed into the nationwide inflation data next week, reinforcing expectations that the BoJ may act sooner. Additionally, headlines of broadening wage growth extending into 2025 also suggest that the conditions for a BoJ rate hike are increasingly being met.

Such dynamics may likely see the BoJ revise up their inflation forecast at the upcoming outlook report. A notable 0.3% upward revision to the previous 3Q gross domestic product (GDP) figure further indicates a supportive growth outlook, though concerns about persistent weakness in consumption remain a key area of caution.

More clarity on US policies awaits

A key factor that influenced the BoJ's decision to hold off on a rate hike in December was the need for greater clarity on the economic policies of the incoming US administration. Therefore, any comments from Trump following his inauguration should be closely monitored. Increased market volatility or heightened uncertainty surrounding US-Japan trade relations could prompt the BoJ to delay its rate hike so as to buy more time to reassess its policy stance.

USD/JPY: Hits three-week low following US inflation data

Narrowing US-Japan bond yield differentials in the aftermath of the recent CPI data has driven the USD/JPY below its near-term range, marking a three-week low. A bearish crossover on the daily moving average convergence/divergence (MACD) signals a slowdown in upward momentum for now. However, attention will now shift to a series of support lines ahead, with the 154.20 confluence standing out as a crucial level. This is where the lower boundary of a channel pattern aligns with a broader upward trendline, potentially providing a key test for buyers.

A pullback to the 154.20 level may hinge on whether the BoJ meets market expectations for a 25 bp rate hike at its upcoming meeting. Should the level fail to hold, a deeper retracement towards the 151.96 level could likely follow.

Japan 225: Risk appetite remains capped by hawkish BoJ expectations

An ascending triangle formation for the Nikkei 225 index failed to trigger an upward breakout, as mounting hawkish expectations may likely cap risk appetite ahead of the upcoming BoJ meeting. Concerns that a rate hike could spark a sharp sell-off, similar to July 2024, may contribute to investors’ hesitation. Trading within the current range may leave the 37,647 level as key support to watch, where the lower base of the range has provided support in recent months. Immediate resistance may be at the 14 January high at the 39,064 level, followed by the upper resistance of the range at the 40,220 level.