BOJ holds in December, but hikes on horizon

Hold matches market projections: At its meeting on 19 December, the Bank of Japan (BOJ) decided to maintain the policy rate at around 0.25%, meeting market expectations. However, the decision was not unanimous, with one member of the BOJ’s nine-person board voting for a hike, suggesting that the BOJ is closer to hiking rates.

BOJ adopts wait-and-see approach: In post-decision remarks to the press, Governor Kazuo Ueda said that the hold—the third in a row after July’s hike—was to give the BOJ time to receive data from next year’s annual wage negotiations in the spring, and also to assess the economic policies of the incoming Trump administration in the U.S.

Probability of January hike declines: All of our panelists expect the BOJ to hike by the end of Q1, with the vast majority expecting a 25 basis points increase. This is in line with the BOJ’s guidance published in its October outlook that it will “continue to raise the policy interest rate” ahead, with inflation exceeding the central bank’s 2.0% target consistently since mid-2022 due to stronger wage growth and a weaker yen. That said, our panel is split as to whether the hike will take place at its next meeting on 23–24 January or in March, with the Bank potentially waiting to scope out the trade policies of the new U.S. Trump administration, with tariffs likely hitting Japan’s economy.

Panelist insight: Goldman Sachs analysts still see a rate hike in January, but point out risks: “We maintain our base case scenario of a rate hike in January 2025. However, although the possibility is low at present, the rate hike could be postponed to March or April, if the branch managers' meetings to be held before the January MPM were to conclude that wage momentum at small and medium-sized enterprises (SMEs) was insufficient, or if uncertainty surrounding the new US administration's economic policies and their impact was significant.” Kyohei Morita and Uichiro Nozaki, analysts at Nomura, now expect a hike in March: “Our main scenario is now for the next rate hike to be in March 2025. […] BOJ Governor Kazuo Ueda's press conference was more dovish than expected. His comments left a strong impression that the BOJ wants to take a more cautious view of wage trends in the lead-up to spring wage negotiations. To that extent, we also sensed a willingness to accept a weak yen.”

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