Bank of Japan (BOJ) Governor Kazuo Ueda has plenty of data to support the case for raising the benchmark rate in December, an outcome that would mark the first tightening of policy three times in a calendar year since the peak of Japan’s asset bubble in 1989.
The governor appears determined to weigh his options until the last minute before the Dec 19 decision. He’ll sift through forthcoming numbers including the central bank’s Tankan survey on Dec 13 and monitor the US Federal Reserve’s own rate decision due several hours before the BOJ’s board sets policy.
Still, expectations of a near-term move are rising. Ueda reiterated in an interview published Saturday that authorities will raise rates if the economy performs in line with projections, and he went a step further by saying the timing for a hike is “nearing” precisely because forecasts have proved prescient. Inflation momentum has been sustained, businesses are planning to invest and wages are rising.
With annual wage talks also off to a fairly bullish start in an indication that the economy is inching toward a virtuous wage price cycle, the December policy meeting promises to be very much a live event. Most economists surveyed last month foresaw a hike by January, and Ueda’s weekend interview probably nudged some of those views forward, as two-year government bond yields rose Monday to the highest since 2008.
“The next rate hike is likely to be in December,” said Ko Nakayama, chief economist at Okasan Securities and a former BOJ official. “The BOJ has said it will do it if the economy goes along with the official projections. There is mounting evidence to support that.”
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The last time the BOJ conducted three hikes in a single year was in 1989. The third increase that year came on Christmas Day just four days before the Nikkei 225 stock average peaked at 38,957.44.
The cumulative scope of those moves, which took the official bank rate to 4.25% from 2.5% at the start of the year, combined with the bank’s warnings about the bubble, weighed heavily on the economy and helped prick the overstretched confidence of investors. The stock market didn’t revisit those heights again until February this year, three and a half decades later.
Ueda faces a very different economic landscape in 2024. Japan is no longer in any kind of potential competition to become the world’s biggest economy. Instead, it’s an ageing economy trying to re-establish a cycle of inflation, economic dynamism and growth. After years of policy experimentation, the governor is looking to return the central bank to an orthodox approach of policy control through interest rates.
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In his first full year since taking the helm in April 2023, Ueda has already made 2024 a landmark year by ending the bank’s massive monetary easing program in March with the first rate hike in 17 years.
The next hike would bring the BOJ’s policy rate to 0.5% from 0.25%, the highest level since 2008. While that’s still very low compared with borrowing costs managed by major global peers, the move still represents a substantial change after it stayed at -0.1% for years as the world’s last negative rate.
While Ueda’s surprisingly rapid march toward normality has been smoother than expected, it has had its speed bumps. The BOJ’s second hike in July helped trigger a market meltdown in early August including the Nikkei’s biggest daily fall on record. But markets eventually settled down.
Ueda has vowed to conduct careful communications ahead of the BOJ’s next move. The governor hasn’t gone so far as to adopt the sort of communication style favored by US Federal Reserve Chair Jerome Powell, who telegraphed a pending rate move by saying “the time has come”.
Ueda’s choice of the word “nearing” allowed him to hint that a move is coming without boxing himself into a precise month.
In the media interview published Saturday, the governor noted that he’s keeping an eye on the wage talks as well as any risks that might emerge from the US economy as authorities attempt to engineer a soft landing at a time of political transition. The robust wage gains achieved this spring were an impetus behind the bank’s decision to begin rolling back its stimulus program in March.
This month’s decision day could see a narrowing of the difference in US and Japanese interest rates with moves from both sides. As of Monday, traders saw around a 67% chance that the Fed will cut rates, and about a 61% chance that the BOJ will hike, doubling from a month ago.
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“If the Fed moves and the BOJ doesn’t, that could shed light on the BOJ’s cautiousness and weaken the yen,” Nakayama said. “That could also be a source of confusion that might destabilise financial markets.”
Some economists say political factors could push the BOJ’s hike decision into January. One reason to pause is Prime Minister Shigeru Ishiba’s weak footing after the ruling coalition lost its majority while sustaining its worst electoral drubbing since 2009 in October.
The premier must seek the cooperation of opposition parities to help pass a JPY14 trillion ($126 billion) extra budget to fund a stimulus package. The government also needs their support to compile a regular budget and undertake law revisions.
“Ishiba is walking a tight rope with his ruling coalition not having a majority in parliament,” BNP Paribas economists Ryutaro Kono and Hiroshi Shiraishi wrote in a report Monday. “The BOJ may decide to wait if Ishiba’s government can’t have proper communications” while also balancing other tasks.
Still, if Ueda didn’t think there was a good chance of hiking in December, he probably wouldn’t have accepted the interview request, according to Naomi Muguruma, a long-time BOJ watcher. The governor only does about two major interviews with the press per year, so the timing of last weekend’s story may be pertinent.
“If the BOJ was thinking about a January rate hike, there was no need to have the interview now and indicate a rate hike,” Muguruma, chief fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co., wrote in a note. “The BOJ is laying the groundwork for an additional hike at the December meeting.”
Charts: Bloomberg
