The Bank of Japan (BOJ) kept its monetary policy settings unchanged as it waits a little longer before its next move, with a dissenter’s proposed rate increase suggesting momentum for another hike is building.
Governor Kazuo Ueda’s policy board left its benchmark rate at around 0.25%, according to a statement Thursday, an outcome expected by more than half of economists surveyed by Bloomberg. The yen (JPY) extended its weakening to more than 1% against the dollar (US$) after Ueda said that more data is needed for the rate decision including on wages.
Board member Naoki Tamura voted against the stand-pat decision, while proposing a rate hike to 0.5%. He said that the economy and prices are moving in line with expectations, and there are increasing upside risks for inflation. Although he was voted down by the rest of the board, his proposal suggests the board may be gearing up toward its next hike.
Ueda is searching for the right moment for his third rate increase, with recent economic indicators showing inflation is moving in line with the BOJ’s projections — a prerequisite for a rate hike. Since taking the helm of the central bank, the governor has been looking to normalize monetary policy after years of experimentation, a mission reinforced by a lengthy policy review also released Friday that emphasised the importance of interest rates.
“They could have hiked this time if they wanted to, and there’s likely to be a rate increase in January,” said Toru Suehiro, chief economist at Daiwa Securities. “The BOJ chose to wait and see partly because it wants to see what the economic policies of the new US administration will be like.”
The yen weakened as much as 1.3% to 156.77 per dollar after Ueda’s remarks at a news conference and the status-quo policy decision. The BOJ governor said that the big picture on wages will be clearer in March or April. Rate hike bets had receded in recent weeks, contributing to a six-day losing streak in the yen through Monday, its longest stretch of declines versus the dollar since June.
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The Topix erased losses of as much as 1.4% earlier in the day, after the US Federal Reserve (US Fed) lowered rates on Wednesday but reduced its forecast for cuts in 2025.
The BOJ may also have been reluctant to raise rates in December given the potential for bad optics. Prime Minister Shigeru Ishiba’s minority government is currently negotiating with an opposition party wary of early rate hikes to ensure support for next year’s annual budget.
There’s also the memory of perceived missteps in the past. Raising interest rates three times in one calendar year hasn’t happened in Japan since 1989, a tightening cited by economists among the factors that led to the bursting of the nation’s asset bubble.
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In the run-up to the meeting, BOJ officials saw little cost to delaying the next rate hike, given only a limited chance of a rapid acceleration in inflation, people familiar with the matter told Bloomberg earlier this month. Some officials were not against hiking rates this month if proposed, according to the people, hinting that the rate move is getting closer.
The bank also reiterated that the inflation trend appears to be consistent with its target for the second half of its outlook period. In Bloomberg’s latest economist survey, January was the most popular timing for the next hike.
For longtime BOJ watchers, Tamura’s rate increase call this time evokes memories of the February 2007 hike, which was preceded by a proposal to raise borrowing costs from three board members in the previous meeting.
The central bank also released the results of its broad policy review Thursday, which looked back on the past quarter century. While noting the benefits of the massive policy experiment conducted under Ueda’s predecessor Haruhiko Kuroda, it also warned that the costs should also be taken into account.
“The review hints at Ueda’s preference for not using unconventional measures by noting their side effects,” said Tsuyoshi Ueno, a senior economist at NLI Research Institute in Tokyo. “That indicates he thinks rates should be raised to create policy space, as long as economic conditions allow.”
The BOJ decision ends weeks of intense guessing in the market. Traders saw as much as two thirds of a chance for a December liftoff at the end of last month, before projections came down to less than 20% this week with a higher chance of a March hike priced in.
The path ahead is still unclear for the BOJ. With the next policy meeting scheduled to conclude four days after Donald Trump takes over the White House, uncertainties remain high. The central bank has said it won’t raise rates when financial markets are unstable.
