The Bank of Japan (BoJ) is considering further monetary policy adjustments as strong wage growth and a thriving services sector bolster its strategy. In January, the services Purchasing Managers' Index (PMI) reached its highest level since September 2024, indicating robust economic activity. Concurrently, the USD is facing challenges due to Federal Reserve rate cut speculations, which are supporting the XAU/USD pair. With the release of U.S. ADP and ISM PMI data on the horizon, the global financial market's focus remains sharp.
In light of recent economic data, the BoJ has revised its terminal rate upward from 1.0% to 1.25%. This adjustment reflects the central bank’s response to stronger-than-expected labour cash earnings growth, which surged by 4.8% year-on-year in December. The upward revision also accounts for steady base earnings, which increased by 2.5% for two consecutive months. Notably, labour cash earnings in December exceeded expectations, and November’s figures saw upward revisions.
Strong wage growth and an expansionary services PMI are key drivers supporting the BoJ’s policy normalization efforts. The BoJ now anticipates two additional rate hikes in May and October of 2025, with a subsequent 25 basis point hike slated for 2026. These planned increases align with Japan's ongoing economic recovery and inflation targets.
Moreover, base earnings showed even stronger growth, climbing to 5.2% in January compared to a revised 3.7% in November. Real cash earnings also rose by 0.6% in January, following a 0.5% increase in November. This consistent upward trend in earnings underscores the resilience of Japan’s labor market and further supports the BoJ’s strategic outlook.
While Japan’s domestic data points towards economic strength, the BoJ remains vigilant about potential external risks. The central bank identifies U.S. trade policy as a significant factor that could impact Japan's economic trajectory. As such, the BoJ remains cautious yet proactive in its approach to monetary policy adjustments.
In the currency markets, the EUR/USD pair is consolidating near its weekly high as of Wednesday. Despite this, the USD continues to face challenges as Federal Reserve rate cut bets undermine its appeal to buyers, inadvertently lending support to major currencies.
The market is currently pricing in another rate hike in July, though an earlier move in May remains plausible given current economic conditions. The BoJ’s cautious yet assertive stance is indicative of its commitment to achieving sustained economic growth and stability.