Bank of Japan Governor Kazuo Ueda has ample data supporting a rate hike in December, which, if enacted, would mark the first time Japan has tightened policy three times in a year since the asset bubble peaked in 1989.
The BOJ governor seems determined to make a decision at the last moment on December 19. He will carefully review upcoming data, including the BOJ's Tankan survey on December 13, and closely monitor the Federal Reserve's interest rate decision that will be released hours before his own.
However, expectations for a recent rate hike from the central bank are still rising. In an interview last Saturday, Ueda reiterated that if the economy performs as expected, the BOJ will raise rates, and he further stated that the timing for a rate hike is 'near at hand,' as forecasts have proven to be prescient. Inflation momentum continues, companies are planning investments, and wages are rising.
The annual wage negotiations have also had a rather optimistic start, indicating the economy is moving towards a virtuous cycle of wages and prices, making the December policy meeting a very important one.
Most economists surveyed last month expect the BOJ to raise rates before January next year, and Ueda's interview last weekend may have brought some of those views forward, as the yield on two-year Japanese government bonds rose to its highest level since 2008 on Monday.
Ko Nakayama, chief economist at Okasan Securities and former BOJ official, said: 'The next rate hike is likely in December. The BOJ has indicated that it will raise rates if the economy meets official forecasts. Increasing evidence supports this.'
The last time the Bank of Japan raised interest rates three times in a year was in 1989. The third rate hike that year occurred on Christmas, and four days later (December 29), the Nikkei 225 index reached its peak of 38957.44. That was the last trading day of the 1980s and a turning point in the decline of Japan's bubble economy. The cumulative effect of these actions raised the official bank rate from 2.5% at the beginning of the year to 4.25%, and combined with warnings from banks about the bubble, it placed heavy pressure on the economy and burst investors' overly inflated confidence, leading the Japanese stock market into a long adjustment period.
It wasn't until February of this year, 35 years later, that the Japanese stock market reached its peak again.
In 2024, Ueda faces a drastically different economic landscape. Japan is no longer in any potential competition to become the world's largest economy. Instead, it is an aging economy trying to rebuild the cycle of inflation, economic vitality, and growth. After years of policy experimentation, Ueda hopes the BOJ will return to orthodox methods of policy control through interest rates.
In his first full year after taking office in April 2023, Ueda has made 2024 a milestone year, ending the BOJ's massive monetary easing program in March and raising interest rates for the first time in 17 years.
The next rate hike will raise the Bank of Japan's policy rate from 0.25% to 0.5%, marking the highest level since 2008. Although this level remains low compared to borrowing costs among major global counterparts, as the last adopter of negative interest rates in the world, the BOJ has maintained a level of -0.1% for many years, making this move a significant change.
While Ueda's unexpectedly swift move towards normalization has gone more smoothly than anticipated, there have been speed bumps. The BOJ's second rate hike in July triggered a market crash in early August, with the Nikkei index recording the largest single-day drop in history, but the market ultimately stabilized.
Ueda vowed to communicate cautiously before the Bank of Japan takes the next step. The BOJ governor has not adopted the kind of communication style favored by Federal Reserve Chair Powell, who previously forecasted upcoming rate actions with phrases like 'the time has come.'
Ueda's choice to use the term 'near' is meant to suggest that action is forthcoming, rather than boxing himself into a specific month.
In a media interview last Saturday, the governor noted that he is closely monitoring wage negotiations and any potential risks to the U.S. economy, as U.S. authorities are trying to achieve an economic soft landing during a political transition. The strong wage growth achieved this spring was a driving force behind the decision to begin tapering the stimulus program in March.
On this month's decision day, the interest rate gap between the U.S. and Japan may narrow with actions from both sides. As of this Monday, traders estimate the probability of a Federal Reserve rate cut at around 67%, while the probability of a BOJ rate hike is approximately 61%, doubling from a month ago.
'If the Federal Reserve takes action and the BOJ does not, it could highlight the BOJ's cautious attitude and weaken the yen,' Nakayama said. 'This could also cause confusion and disrupt the stability of financial markets.'
Some economists indicate that political factors may delay the Bank of Japan's rate hike decision until January next year. One reason for pausing the rate hike is Prime Minister Shigeru Ishiba's difficult position after his ruling coalition lost its majority, suffering its worst defeat since 2009 in the October elections.
Shigeru Ishiba must seek cooperation from the opposition to help pass an additional budget of 14 trillion yen (about $93 billion) to fund the economic stimulus plan. The government also needs their support to prepare the regular budget and carry out legal revisions.
Economists Ryutaro Kono and Hiroshi Shiraishi from BNP Paribas wrote in a report on Monday: 'Shigeru Ishiba's ruling coalition did not gain a majority in parliament, and his situation is quite difficult. If his government cannot communicate appropriately while balancing other tasks, the Bank of Japan may decide to wait.'
However, Naomi Muguruma, chief fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities, who has long been concerned about the direction of the BOJ, believes that if Ueda thinks the likelihood of a rate hike in December is low, he may not accept interview requests. The BOJ governor only accepts two major media interviews each year, so the timing of last weekend's report may be related to this.
Muguruma wrote in a statement: 'If the Bank of Japan is considering a rate hike in January, then there is no need to conduct interviews now to indicate a rate hike. The BOJ is laying the groundwork for another rate hike at the December meeting.'
Article forwarded from: Jin Shi Data