The Japanese national flag flutters as a pedestrian walks near the headquarters of the Bank of Japan (BOJ) in Tokyo, Japan, Monday, September 14, 2020.
Kiyoshi Ota | Bloomberg | Getty Images
The Bank of Japan (BOJ) is likely to keep its benchmark interest rate unchanged this week, as it awaits more clarity on domestic wages and spending trends as well as policy changes by the incoming administration of US President-elect Donald Trump, according to a survey. Of the economists polled by CNBC.
A narrow majority of 13 out of 24 economists, or 54%, said the Bank of Japan was likely to keep its benchmark interest rate unchanged at 0.25% at the end of its two-day meeting on Thursday. The same number of economists expect the Bank of Japan to raise interest rates in January. The survey was conducted from December 9 to 13.
The Bank of Japan, which last raised interest rates in July, has signaled its readiness to tighten monetary policy further if wage and price growth matches its expectations. In a recent media interview with Bank of Japan Governor Kazuo Ueda He suggested raising interest rates again “It's getting closer in the sense that the economic data is on track,” but he also pointed to risks, including next year's wage trends and potential changes in US economic policy.
Japanese interest rates are the lowest among developed countries due to the Bank of Japan's long-standing policy of supporting the country's moribund economy. The policy has kept the yen weak against most major currencies, boosting exports and tourism and stimulating so-called “carry trades” when investors borrow the yen to bet on high-yielding assets. These trends could reverse as Japanese interest rates rise while central banks elsewhere begin to cut interest rates.
Several economists told CNBC they believe the latest data suggests Japan's economy is broadly on track to meet the central bank's 2% inflation target, driven by wage growth. However, they noted that the Bank of Japan may prefer to wait another month to assess wage-driven inflation dynamics, focusing on the momentum generated by next spring's wage negotiations and Trump's trade and tariff policies.
The Bank of Japan has not yet gained confidence in its forecasts, according to Akira Otani of Goldman Sachs Japan. He noted that the central bank lacks sufficient clarity on whether small and medium-sized enterprises will be able to sustain wage increases, a risk the Bank of Japan has cited as crucial to achieving the inflation target. Japanese unions typically negotiate wage increases in the first three months of the calendar year before the fiscal year that begins in April.
The view that the central bank is likely to hold interest rates this week also gained momentum after recent media reports suggested that policymakers want more time to monitor external risks and gather additional evidence about Japan's wage outlook.
Shigeto Nagai, head of Japan economics at Oxford Economics, said in a note last week that the BOJ's “confusing communications” now point to a likely outcome of the central bank leaving interest rates unchanged pending additional information from spring wage negotiations and U.S. policy developments.
Regular wages in Japan are growing annually at a rate of 2.5% to 3%, with inflation remaining above the Bank of Japan's target (2%) for thirty consecutive months. While the authorities are keen to normalize monetary policy, they also fear raising interest rates too quickly after more than two decades of deflation. Indeed, Japanese household spending fell for three straight months starting in October, while factory production was volatile.
Teppei Inoue, head of Tokyo Global Markets Research at MUFG Bank, also highlighted changing market expectations due to media reports. Overnight swap markets have significantly reduced bets on a rate hike in December, suggesting a 77% probability of no change as of Monday morning – much higher than the 35% probability of staying unchanged at the end of November.
“Judging by (media) reports so far, the possibility of a postponement of the rate hike seems to have increased,” Ino told CNBC on Friday.
“However, given the current trend of yen depreciation and the upcoming FOMC meeting just before the BOJ meeting, we should keep in mind that there is still the possibility of a surprise decision to raise interest rates if the USD/JPY reaches levels like 155.” In reference to the Federal Open Markets Committee meeting scheduled for this week.
The yen was trading at around 154 to the dollar on Monday morning.
To be sure, some economists still expect the Bank of Japan to tighten policy this week.
Nomura expects the Bank of Japan to raise interest rates by 25 basis points on Thursday, noting that fundamentals such as the economy and prices are on the right track. However, the bank also acknowledged that a rate hike may be delayed due to uncertainties surrounding US policy.
“We believe the Bank of Japan may also decide to postpone any rate hike if it decides to focus more on uncertainties, including US policy behavior and market trends (in the forex market in particular) during the Christmas season, when markets tend to be calm. Research analyst Kyohei Morita said in a note dated December 11.
The brokerage also cited uncertainty over the government's financial support for households as a possible factor that might prompt the Bank of Japan to postpone the interest rate increase. Prime Minister Shigeru Ishiba, whose government lacks a parliamentary majority, is currently negotiating with opposition parties about the size of the proposed increase in the annual minimum taxable income.
Currency risk
Many analysts have highlighted the Japanese yen as a major factor influencing their outlook on the Bank of Japan's decisions.
“The most important and likely driver that could change my outlook is the yen,” said Kazuo Moma, an executive economist at Mizuho Research, who said the Bank of Japan was likely to hold steady this week and raise interest rates by 25 basis points in January. “An accelerated yen depreciation would upset the public and the federal government, forcing the Bank of Japan to adopt a more aggressive stance on raising interest rates,” he said.
Jun Takazawa, Asia economist at HSBC, stressed risks in both directions.
“On the one hand, a stronger US dollar driven by US fiscal, monetary and trade policies could influence the yen and accelerate the BOJ's policy normalization process. On the other hand, a weaker yen – within limits – supports Japan's recovery efforts. So an excessive yen strength “It may delay interest rate hikes.”
According to a CNBC poll of 24 analysts, the yen is expected to average 147.4 against the US dollar by the end of 2025. The dollar rose 2.4% against the yen last week as traders trimmed their bets on a rate hike from the Bank of Japan this month.
