RPT-MNI POLICY:Equities, Politics To Weigh On BOJ Dec Decision

Bank of Japan officials believe a rate hike at the Dec 18-19 meeting represents a logical and appropriate move, but how the increase impacts equity markets, and the potential for political criticism, could hinder the board’s decision, MNI understands. 

Lawmakers directed harsh criticism at the BOJ following July’s hike and subsequent Nikkei selloff, which caught senior Bank officials off guard. They are now far more attuned to political considerations.

Market moves since July have also confused the BOJ, while public comments by officials have been erratic, meaning fear – not economic models and price assessments – were informing policy decisions. The increased political pressure is also adding to their inertia.

However, politicians will likely hold their criticism should the yen depreciate toward JPY160 against the U.S. dollar – boosting import prices and squeezing household purchasing power – while continued high inflation will also justify a rate hike. (See MNI POLICY: Weaker Yen Ups Dec Hike Chances But US Vote A Risk)

Real interest rates remain at very low levels and core CPI has held above 2% for 30 months as of September. The yen has also weakened about 3.2% to JPY155.65 since mid-October.

U.S. CONSIDERATIONS

Uncertainty on incoming U.S. trade policies next year and their impact on the global economy could also stymie a hike next month. 

While the U.S. remains solid it cannot shoulder the global economy. Slowdowns in China and the eurozone will hurt the U.S. economy eventually, which will also weigh on Japanese exports, a key factor for the Bank’s outlook. The Japanese economy could then experience stagflation as inflation remains elevated, making it difficult for the BOJ to manage monetary policy.

While the U.S. Federal Reserve and International Monetary Fund expect the American and global economy to accelerate in 2025, those predictions were made before Donald Trump’s re-election.

BOJ officials want to see revision of their economic growth forecast including Trump’s economic policies, however, this will remain unknown until some time after he takes office on Jan 20. The IMF will release its global economic forecast around mid-January.

The board may resist the temptation, despite the Japanese economy currently moving in line with its forecasts, to raise the rate in December if it believes economic and price conditions will worsen under Trump’s policies.