On December 19, the Bank of Japan decided to keep interest rates unchanged and did not disclose when they would be raised, leading to a significant drop in the yen and bond yields, with the yen falling to its lowest level in four months.
The nine members of the Bank of Japan’s Policy Board decided to maintain the short-term policy rate at 0.25%, a decision that was in line with external expectations. Only one hawkish board member, Naoki Tamura, proposed raising the rate to 0.5%, citing rising inflation risks, but was unsuccessful.
This indicates that the monetary policy makers at the Bank of Japan are opting for a cautious stance in the face of uncertainty surrounding the economic plans of US President-elect Trump.
The previous day, the US Federal Reserve decided to cut interest rates and signaled a more cautious easing policy for next year, leading to a sharp decline in global stock markets.
Bank of Japan Governor Kazuo Ueda reiterated that if the economy and prices align with their forecasts, the central bank will continue to raise interest rates.
When asked why the Bank of Japan decided to keep rates unchanged, Ueda stated that the bank wants to wait for data on whether wage growth will maintain its upward momentum next year, as well as for Trump’s economic policies to become clearer.
He said, “Overall, the likelihood of the Japanese economy aligning with our forecasts is increasing. But we would like more information to believe we can raise rates. This includes the sustainability of wage growth.”
Investors widely believe that his remarks reduce the chances of the Bank of Japan raising interest rates at the next meeting in January. This led to the US dollar rising to 157.075 yen, up 1.4%, reaching its highest level since July this year.
Due to Japan’s interest rates lagging behind other major economies, the yen has been hovering at its lowest levels in 30 years in recent months.
The Bank of Japan will hold its next monetary policy meeting on January 23-24. The central bank’s report on regional economies will be released on January 9, providing clues on whether wage increases are expanding and taking root in small businesses.
Deputy Governor of the Bank of Japan, Ryoji Hino, will give a speech and hold a press conference on January 14, which may further indicate whether the central bank will raise rates in January.
In a Reuters survey conducted earlier this month, all respondents expected the Bank of Japan to raise rates to 0.50% by the end of March next year, but there were differences in the specific timing of the rate hike.
The Bank of Japan ended its 17-year negative interest rate policy in March this year and raised rates to 0.25% in July. The bank has stated that it is prepared to raise rates again if wages and prices change as expected.
Decision-makers at the Bank of Japan hope that regular wages for workers can maintain growth between 2.5% and 3% in recent years to support consumption.
With the intensifying labor shortage, signs of enterprises continuing to raise wages are becoming more evident, signaling positively for the Bank of Japan’s gradual rate hike plans.
However, slowing Chinese demand and uncertainty about the consequences of Trump’s policies may put pressure on business profits and cause some companies to be reluctant to raise wages.