Will the Bank of Japan not raise rates in December?

The Bank of Japan has once again demonstrated a cautious attitude towards further interest rate hikes at its recent monetary policy meeting.

On Monday, the minutes from the Bank of Japan's October meeting (before the U.S. election) showed that policymakers have not yet reached a consensus on whether to raise interest rates in December. Some policymakers warned that the market may experience volatility again after the U.S. election, necessitating close attention to market dynamics, especially changes in the yen exchange rate.

Aftershocks of the U.S. election linger, Japanese political instability affects interest rate hike prospects

At the meeting held from October 30 to 31, the Bank of Japan maintained the benchmark interest rate at 0.25% and stated that the risks to the U.S. economy have somewhat diminished, with conditions for another rate hike beginning to form.

On November 5, Donald Trump was elected President of the United States, leading to a rise in global stock markets and a strengthening of the dollar. However, analysts warned that if Trump insists on raising tariffs, the market will be turbulent again. One committee member in the meeting minutes also stated that although the risk of a hard landing for the U.S. economy has decreased, "it is still too early to conclude that the market will return to calm," while another member indicated that the central bank must "take time and act cautiously" when considering a rate hike.

Analysts believe that a further interest rate hike by the Bank of Japan could trigger market turmoil and disrupt the long-term path of the bank's monetary policy normalization, with some economists stating that the Bank of Japan's rate hike in July was one of the factors that led to the global market crash in early August.

Additionally, political instability in Japan is a key factor affecting the Bank of Japan's rate hike path. Last month, Prime Minister Shigeru Ishiba faced the worst election results for the ruling party since 2009. A key opposition party leader stated that the Bank of Japan should not raise interest rates before March.

According to a Reuters poll, the vast majority of economists expect that the Bank of Japan will not raise interest rates again this year.

A December rate hike is not "impossible," yen weakness exacerbates inflation pressure

However, a rate hike is not "impossible," as some committee members believe it is necessary to clearly convey the determination of the Bank of Japan to continue raising rates "when the economy and price levels meet expectations." One member stated, "The Bank of Japan should consider further rate hikes after pausing to assess the development of the U.S. economy," adding that the Japanese economy no longer requires substantial monetary policy support.

At the same time, Bank of Japan Governor Kazuo Ueda has not ruled out the possibility of a rate hike next month, having previously stated:

"The rise in inflation risk due to yen weakness was one of the key factors in the Bank of Japan's decision to raise rates in July."

Currently, yen weakness has become a headache for Japanese policymakers, who are concerned that rising costs of imported fuel and raw materials will impact consumption. Many observers believe that the fate of the yen is a catalyst for the next rate hike.

Over the past month, the yen has weakened against the dollar, which may further exacerbate inflation pressure in Japan. Due to cautious attitudes among investors regarding the risk of Japanese authorities intervening to buy yen, the current dollar-to-yen exchange rate is 153.49, down from last week's high of 154.70.