BOJ's Rate Hike Plans Leave Market in Limbo

The Bank of Japan's (BOJ) upcoming policy meeting on Wednesday and Thursday has the market in a state of confusion, with investors struggling to decipher Governor Kazuo Ueda's intentions regarding future rate hikes, reports Nikkei Asia.

Just two weeks ago, nearly 70% of market players anticipated a rate hike this month. However, following Ueda's comments in a November 28 interview with Nikkei, that number has plummeted to less than 20%, with most now predicting a hike to 0.5% at the January 23-24 meeting.

Ueda's comments, initially interpreted as signaling an imminent December hike, have been reinterpreted as a call for patience. "The next rate hikes are 'nearing', but he still wants to check on the momentum toward wage hikes next year and the pricing trends outside large corporations," Nikkei reports.

This shift in messaging has left the market grappling for clarity. "The time is more than ripe for a rate hike as far as inflation trends are concerned," says Tatsuo Yamasaki, a former vice minister of finance, to Nikkei. "But Mr. Ueda appears to be tamping down such expectations and signaling he wants to proceed more cautiously."

This uncertainty is reflected in the yen-dollar exchange rate, which has fluctuated wildly in recent weeks, moving from near 157 to 149, then to 152, over the past four weeks. This volatility underscores the BOJ's challenge in establishing clear communication with the market.

"The current situation is far from ideal -- where the market understands the direction of monetary policy without explicit signals from the BOJ simply by observing economic indicators," says Tomoaki Shishido, a rates strategist at Nomura, to Nikkei.

While the BOJ is focused on the sustainability of inflation after years of near-zero price increases, other economic factors are also at play. Yamasaki points to weaknesses in the economy, including sluggish private consumption, a persistently weak yen, and struggles within the small business sector.

"Private consumption is the weakest part of the economy at the moment," Yamasaki states. "The priority should be on how to raise real wages."

The BOJ is hopeful for a substantial wage increase in 2025, but concerns are mounting as corporate earnings decelerate due to a weakening Chinese economy and uncertainty surrounding US-China trade relations under President-elect Donald Trump.

Yamasaki argues that the key challenge for wage growth next year lies not with unionized workers, but with non-union members at small businesses, who have borne the brunt of the weak yen's impact on import costs.

The direction of the yen remains unclear. While the Fed is widely expected to cut rates this week and twice more in 2025, BofA Securities economists predict that 10-year Treasury yields will remain elevated, putting upward pressure on the dollar and pushing the yen to 160 to the dollar by the end of 2026.

The BofA economists predict that the BOJ will deliver its next rate hike, to 0.5%, in January, followed by an increase to 0.75% in July after upper house elections, with a final bump in January 2026 to bring the terminal rate to 1%.

"However, we think the risks to the terminal rate are tilted to the upside," they said, citing such possibilities as continued structural capital outflows."