- The Bank of Japan is set to raise interest rates to 0.50% on Friday.
- All eyes will be on the language of the policy statement and Governor Ueda’s press conference.
- The Japanese Yen could experience intense volatility following the BoJ’s policy announcements.
The Bank of Japan (BoJ) is widely expected to raise the short-term interest rate from 0.25% to a 17-year high of 0.50% in January, following the conclusion of its two-day monetary policy review on Friday.
The Japanese Yen (JPY) is set to move strongly following the BoJ’s policy announcements, as investors look for new clues on the central bank’s next policy move.
What to expect from the BoJ interest rate decision?
The BoJ is likely to start 2025 with some action as it remains on track to revive its rate hike cycle after pausing for three consecutive meetings. In July 2024, the Japanese central bank unexpectedly raised rates by 15 basis points (bps) from 0.1% to 0.25%.
Markets speculated that a series of higher-than-expected inflation readings, continued depreciation of the JPY and a strengthened fiscal budget strengthened the case for a BoJ rate hike at the January meeting.
Tokyo’s annual Consumer Price Index (CPI) rose 3% in November, up from 2.6% in October. Core inflation, which excludes food and energy costs, rose 2.4% in the same period after reporting 2.2% growth in October. Tokyo’s inflation numbers are widely considered a leading indicator of national trends.
Meanwhile, Japan’s annual Producer Price Index (PPI) remained at 3.8% in December, driven mainly by high food prices, particularly a 31.8% increase in agricultural product costs. Separately, Japan’s cabinet approved a historic $732 billion budget for the fiscal year starting in April, while restricting new bond issuance to its lowest level in 17 years, according to Reuters.
Recent hawkish comments from BoJ Governor Kazuo Ueda and Deputy Governor Ryozo Himino also pointed to a likely rate hike this week. Ueda said Jan. 16 that board members “will discuss at next week’s meeting whether to raise rates.” In his speech on January 14, Himino noted: “Japan’s inflation expectations have gradually increased, now around 1.5%. Japan’s economy is moving roughly in line with our scenario that projects underlying inflation, inflation expectations that move around 2%.”
With a rate hike all but assured, the language of the policy statement and Governor Ueda’s post-meeting press conference, scheduled for 06:30 GMT, will help determine the path of the bank’s next policy move.
The BoJ will also release its quarterly Outlook Report and is expected to raise its inflation projections amid the gradual depreciation of the Japanese Yen and a recent rise in the cost of rice, Bloomberg reported, citing people familiar with the matter.
Analysts at BBH said: “The Bank of Japan’s two-day meeting ends on Friday with an expected 25 basis point hike to 0.5%. Markets have consolidated the odds of a hike over the past week to around 85% after “BoJ officials expressed more confidence in boosting wage growth.”
“In our view, the threshold for a hawkish surprise is high because the BoJ will want to avoid destabilizing markets as it did in July. As such, the Yen is likely to remain under downward pressure as markets continue to price in that the policy rate will reach around 1% in the next two years,” the analysts added.
How could the Bank of Japan’s interest rate decision affect USD/JPY?
Reuters reported last week, citing sources familiar with central bank thinking, that the BoJ is expected to maintain its hawkish stance while raising rates. The hardline rise could be influenced by global financial market developments, such as the return of United States (US) President Donald Trump to the White House.
If the BoJ struggles to provide consistent guidance on the next policy move, reiterating that it will remain data-dependent and make a decision at every meeting, the Japanese Yen is likely to resume its decline against the US Dollar (USD).
USD/JPY could fall sharply if the BoJ hints at a rate hike in March while expressing greater concerns about inflation.
Any initial reaction to the BoJ’s policy announcements could be temporary ahead of Governor Ueda’s press conference. Investors will continue to pay close attention to US President Donald Trump’s tariff talks, which trigger a huge market reaction.
From a technical perspective, Dhwani Mehta, lead analyst for the Asian session at FXStreet, notes: “USD/JPY remains confined between the 21-day SMA and the 50-day variant ahead of the BoJ showdown. However, the 14-day Relative Strength Index (RSI) stands just above 50, suggesting that the pair could break the consolidation phase to the upside.”
“A hawkish BoJ hike could reignite USD/JPY’s correction from six-month highs of 158.88, pushing the pair towards the 200-day SMA at 152.85. Next support is seen at the 100-day SMA of 151.59 Further declines could challenge the round 151.00 level. Alternatively, buyers must achieve a sustained break above the level. 21-day SMA at 157.13 to resume uptrend towards multi-month highs of 158.88. Buyers will then target psychological level of 160.00,” Dhwani adds.
economic indicator
BoJ interest rate decision
He Bank of Japan sets the interbank interest rate. This rate affects a range of interest rates set by commercial banks, building societies and other institutions towards their own savers and borrowers. It also affects the price of financial assets, such as bonds, stocks and exchange rates, which affect consumer and business demand in a variety of ways. If the Bank of Japan has a firm outlook on the Japanese economy and increases the current interest rate, this is bullish for the yen. On the other hand, a mild outlook that leads the bank to reduce or maintain current rates will be bearish for the yen.
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Next post:
Fri Jan 24, 2025 03:00
Frequency:
Irregular
Dear:
0.5%
Previous:
0.25%
Fountain:
Bank of Japan
Central banks FAQs
Central banks have a key mandate to ensure price stability in a country or region. Economies constantly face inflation or deflation when the prices of certain goods and services fluctuate. A constant rise in the prices of the same goods means inflation, a constant fall in the prices of the same goods means deflation. It is the central bank’s job to keep demand in line by adjusting its interest rate. For the largest central banks, such as the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has an important tool to raise or lower inflation: modify its reference interest rate. At pre-communicated times, the central bank will issue a statement with its reference interest rate and give additional reasons why it maintains or modifies it (cuts or raises it). Local banks will adjust their savings and loan rates accordingly, which in turn will make it harder or easier for citizens to make a profit on their savings or for companies to borrow and invest in their businesses. When the central bank substantially raises interest rates, we speak of monetary tightening. When you reduce your reference rate, it is called monetary easing.
A central bank is usually politically independent. Members of the central bank’s policy council go through a series of panels and hearings before being appointed to a position on the policy council. Each member of that council usually has a certain conviction about how the central bank should control inflation and the subsequent monetary policy. Members who want a very loose monetary policy, with low rates and cheap loans, to substantially boost the economy, while settling for inflation slightly above 2%, are called “doves.” Members who prefer higher rates to reward savings and want to control inflation at all times are called “hawks” and will not rest until inflation is at 2% or just below.
Typically, there is a chair who leads each meeting, has to create a consensus among the hawks or doves, and has the final say when votes need to be divided to avoid a 50-50 tie on whether to adjust current policy. The president will give speeches, which can often be followed live, communicating the current monetary stance and outlook. A central bank will try to push its monetary policy forward without causing wild swings in rates, stocks, or its currency. All central bank members will channel their stance toward markets ahead of a monetary policy meeting. A few days before a monetary policy meeting is held and until the new policy has been communicated, members are prohibited from speaking publicly. This is what is called the silent period.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
