The Bank of Japan (BoJ) may be on track for a rate hike this January, bolstered by robust wage growth and other economic indicators. Despite Governor Kazuo Ueda's comments at the last BoJ meeting, which cited two factors for holding rates steady, the market remains steadfast in its anticipation of a January rate increase. Recent data on consumption and wage growth, alongside increasing inflation, reinforce the likelihood of this monetary policy shift.
In November, Japan witnessed a rise in labour cash earnings growth by 3.0% year-on-year, up from 2.2% in October and surpassing the market consensus of 2.7%. Moreover, the BoJ's preferred measure of same sample-based cash earnings climbed by 3.5% in November, compared to 2.8% in October. This upward trend in earnings indicates a strengthening economic environment that supports a potential rate hike.
Inflation continues to accelerate, with Tokyo reporting a 3.0% year-on-year gain in January. The end of the government energy subsidy program has contributed to rising inflation rates in November and December. Although inflation-adjusted real cash earnings dipped slightly by -0.3% in November, this was an improvement over October's -0.4%, and better than the market consensus of -0.6%.
The financial landscape is also influenced by external factors, such as Trump's policies, which pose risks to the base case scenario. Additionally, the Federal Reserve's anticipated slowdown in rate cut pace adds complexity to the global economic outlook. The cautious market mood favors the USD, preventing significant rebounds in currency pairs.
In the UK, the bond market sell-off has impacted the GBP/USD pair, with the 10-year gilt yield reaching its highest level since August 2008. This sell-off underscores broader market apprehensions that could influence global financial dynamics.
Bitcoin's US spot Exchange Traded Funds experienced an outflow exceeding $568 million on Wednesday, reflecting the volatile nature of cryptocurrency markets amid fluctuating economic conditions.
Looking ahead, the preliminary results of Shunto, Japan's annual wage negotiations, will be available in March. These negotiations play a crucial role in shaping wage growth expectations and could further influence BoJ policy decisions.