The Bank of Japan (BoJ) has made the decision to hold interest rates at 0.50%. This action is a further indication of their dovishness on the monetary policy front allowing the economy to continue its tenuous recovery. The board ended up adopting that resolution with a unanimous 7-2 vote. Board members Naoki Tamura and Hajime Takata opposed this view, insisting on a 25-basis-point hike to 0.75%. The effective result is a testimony to the BoJ’s ability to navigate through tumultuous external economic headwinds. It prepares for its last monetary policy meeting of the year December 18-19.
Governor Kazuo Ueda emphasized that the central bank will be closely monitoring wage growth prospects as it considers any future tightening measures. The latest ruling has come against the backdrop of Japanese economic data being released, adding to these impressions and expectations on markets.
The BoJ already just made such a key announcement. Next, Tokyo Consumer Price Index (CPI) will be out soon which may have a significant impact on the BoJ’s perceptions ahead of the next meeting. The CPI has been the primary indicator for the direction of inflation in Japan. Its results can have a major impact on market sentiment regarding future interest rate increases.
Unsurprisingly, the yen has seen a significant amount of pressure, with the USD/JPY rallying to an eight-and-a-half-month high in the wake of the BoJ’s announcement. This development is a reflection of broader market trends. The US Dollar Index (DXY) has blown out to a three-month high at time of writing, about 98.53.
Market analysts are eagerly watching to see what the wider implications of today’s Tokyo CPI release. A high reading would increase demand for the Yen, producing a bullish Yen outlook. Conversely, a low reading is sure to result in renewed currency depreciation. Swap markets are now pricing in a roughly 25-30% chance of such a move coming from the BoJ’s meeting this December. This low-ball estimate is based on current rates.
What action has the US Federal Reserve taken on international monetary policy? Until recently, they would announce widely-expected 25-basis-point cuts in interest rates before each meeting. Fed Chair Jerome Powell remarked, “a further reduction in the policy rate at the December meeting is not a foregone conclusion,” emphasizing a data-dependent approach as the Fed navigates its future monetary policy trajectory.
Kazuo Ueda noted that it may “take a little longer to see how US tariff impacts would affect the Japanese economy.” This anecdote speaks to the interconnectedness of global economic conditions and their downstream impact on Japan’s ability to get back on its feet.
The BoJ’s cautious stance is further illustrated by Ueda’s commitment to potentially adjusting the policy rate if economic conditions and prices align with forecasts. He stated that the central bank would “continue to raise the policy rate if the economy and prices move in line with our forecast, in accordance with improvements.”
Make no mistake, Japan is a tough market to navigate. Later this month and over the next few weeks, important indicators such as the Unemployment Rate, Industrial Production, Retail Sales and seasonally adjusted Retail Trade will be released. Ultimately, these are the data points that will guide the BoJ in determining the direction of their policy. They’ll be shaping market expectations too, as we head towards the new year.