MNI BOJ WATCH: Board To Hold, Chart Cautious Path
MNI (TOKYO) - The Bank of Japan board is likely to keep the policy interest rate at 0.25% when it meets over Dec 18-19 as policymakers choose a more cautious path and see no clear benefit to a rate hike this month amid heightened uncertainties.
Policymakers do not see immediate upside risk to prices and they want to study wage increases and the global economy before they consider another hike, even though the uncertainty over the U.S. economy will likely persist into 2025.
The BOJ will also update its medium-term economic growth and inflation forecasts within the quarterly Outlook Report, published alongside the Jan 23-24 board meeting, making it easier for the Bank to justify a hike next month. A weaker yen towards JPY160 against the greenback, currently trading at JPY153, will also increase pressure on the Bank to act.
BOJ overnight index swaps have priced in a 53% chance of a hike at the January meeting and a 0.64% policy rate by October. The Board has held the rate steady since July. (See MNI BOJ WATCH: Ueda Keeps Rate Hike Options Open)
WAGE HIKE CONFIDENCE
While Bank officials are confident of wage hikes at major firms on the back of high profits, they remain less sure about smaller firms, which have not experienced the same level of profit growth due to their difficulty transferring high costs to prices.
The Japanese Trade Union Confederation Rengo’s first wage hike survey, released on March 15, showed base pay rose 3.70% and average total wages rose 5.28%, later revised to 3.56% and 5.10% in July.
BOJ officials will scrutinise how wage increases at major firms, with data available in or after January, will deviate from this year to gauge its strength, momentum and sustainability. They want to see at least 3% base pay to support private consumption and strengthen the foundation for the 2% price target. (See MNI POLICY: BOJ Unaffected By Weak Underlying Inflation)
While data on smaller firms will not be available before June, bank officials will make a forecast based on major-firm increases, which will filter through to smaller firms. They will also focus on regional reports at the branch managers’ meeting on Jan. 9.
HIKING APPETITE
While many board members do not see the need to hike this month, they understand the need for further normalisation and for the policy rate to be 0.50% by March.
Uncertainties over the U.S. economy and global trade under President-elect Donald Trump will continue in January and BOJ officials are paying attention to how financial markets evolve, particularly dollar/yen.
While Bank officials do not want the yen to weaken, a softer currency will boost import prices and increase the burden on households, which will enable the BOJ Board to act without concern for political criticism.