Is the BOJ Interest Rate Hike Coming Soon?

As of October 2024, Japan's central bank policy rate was set at 0.25%. This marked a shift from the previous negative interest rate policy when the Bank of Japan raised short-term rates for the first time in 17 years in March 2024. Since August 2024, the BOJ has maintained the uncollateralized overnight call rate at 0.25%.

Let's discuss if another rate hike for Japan is coming soon in 2025. 

BoJ to remain undeterred, says CNBC

Despite Japan's ruling Liberal Democratic Party (LDP) losing its lower house majority, analysts expect the Bank of Japan (BoJ) to remain undeterred in its pursuit of rate hikes, says CNBC. The LDP's electoral setback is unlikely to influence the BoJ's path toward normalizing monetary policy. While political instability may cause some uncertainty, economists argue that sustained weakness in the Yen will keep the BoJ on track for future hikes. 

Analysts, including those from Bank of America and Citi, emphasize that the central bank will likely proceed with its policy intentions regardless of the election results. Additionally, the BoJ's independence, particularly under Governor Kazuo Ueda, is crucial in maintaining its course. Market reactions to the political outcome include a rise in Japan's stock market and a weaker Yen, but analysts remain optimistic about Japan's corporate earnings and long-term growth prospects.

More rate hikes incoming, as per analysts

According to a Reuters poll, the Bank of Japan (BOJ) is expected to raise interest rates at its December meeting due to concerns about the weakening Yen and a strengthening economy. Over half of economists in the poll (56%) predict the BOJ will hike borrowing costs by 25 basis points to 0.50% by the end of the year. 

Analysts believe that the BOJ's decision is driven by economic growth, inflation concerns, and the Yen's depreciation, which has raised import costs. Furthermore, 90% of economists forecast the BOJ will reach a 0.50% rate by March 2025. Many also anticipate that the return of Donald Trump to the White House will prompt further rate hikes due to inflationary pressures from US policies. While the BOJ is cautious about its rate hikes' economic impact, it is expected to respond to these inflationary risks, especially if the Yen weakens.

Governor Ueda warns against prolonged low borrowing costs

Bank of Japan Governor Kazuo Ueda cautioned against keeping borrowing costs too low for an extended period, emphasizing that prolonged stimulus could lead to an unexpected acceleration in inflation. In his comments, Ueda stressed that the central bank must promptly scale back its economic support to avoid fueling excessive inflation. His remarks came amidst growing signs that Japan's economy is moving towards wage-driven inflation, with increasing evidence of wage hikes pushing businesses to raise prices across goods and services. 

Ueda also indicated that the BOJ would not necessarily wait for external uncertainties, such as the impact of Donald Trump's economic policies, to fully resolve before making rate changes. While he did not provide clear guidance on whether a rate hike would occur in December, his speech hinted at the possibility of tightening monetary policy shortly, depending on economic and inflation data.

54% probability of a rate hike at the upcoming December policy meeting

Based on comments from Governor Kazuo Ueda and recent market reactions, markets are now pricing in a 54% chance of a 0.25% interest rate hike by the Bank of Japan (BOJ) at its upcoming December policy meeting. This marks a slight shift in expectations, driven by the governor's warning against keeping interest rates too low for too long, which could fuel excessive inflation. 

Although Ueda did not explicitly signal the timing of a rate hike, the probability of an increase has risen in response to his remarks, especially as the Yen weakened against the Dollar following his speech. The BOJ's cautious stance amid global uncertainties, such as the economic policies under US President Donald Trump, has kept markets guessing about future monetary tightening. Despite the market's anticipation, a Reuters poll revealed that a majority of economists still expect the BOJ to wait until early 2025 before implementing any rate changes.

BOJ signals progress toward wage-driven inflation

Bank of Japan (BOJ) Governor Kazuo Ueda expressed optimism about Japan's economic recovery, noting signs of progress toward a wage-driven inflation cycle. He highlighted that wage hikes are gaining traction, prompting businesses to increase prices across both goods and services. Ueda's comments reflect the BOJ's ongoing strategy to push inflation toward its 2% target, which is supported by rising wages in a tight labor market. 

The governor emphasized that while the BOJ remains cautious about external risks, such as global uncertainties from the US and geopolitical tensions, the bank would continue to adjust its monetary policy based on domestic economic data. His remarks suggest that Japan is gradually moving towards sustained inflation, driven by higher wages, and that the BOJ is prepared to raise interest rates when necessary to keep inflation in check. However, he did not confirm a timeline for the next rate hike, leaving markets uncertain about immediate actions.

Inflation at 2.5% for fiscal 2024, but slowing in fiscal 2025

The Bank of Japan's updated economic projections forecast core inflation at 2.5% for fiscal 2024, maintaining its earlier estimate. However, the BOJ lowered its inflation outlook for fiscal 2025 from 2.1% to 1.9%, signaling a potential slowdown in price growth. 

The decrease is attributed to falling oil and natural resource prices, affecting inflationary pressures. While inflation remains above the BOJ's 2% target, the revision suggests that price increases may moderate over the next year. Despite this, the central bank still aims to achieve stable, wage-driven inflation. 

For fiscal 2026, the BOJ kept its inflation forecast steady at 1.9%, indicating that inflationary pressures could remain subdued in the longer term. This adjustment reflects the ongoing challenges posed by external factors, such as global energy prices, while domestic inflation is expected to stabilize. The BOJ focuses on achieving a balanced, sustainable inflation rate over the next few years.

Rate hikes impacting traders in 2025

The BOJ's interest rate hikes, anticipated in December 2024, will likely impact traders in 2025 by increasing market volatility. Traders will closely monitor the Yen's performance, inflation data, and global factors. Rising interest rates could lead to a stronger Yen and shifting investment flows, influencing currency and equity markets.