The market calmly faces Trump's return to the White House as the Bank of Japan moves towards interest rate hikes

According to Zhitong Finance APP, after the global financial markets reacted relatively calmly to Trump's return to the White House, the Bank of Japan is expected to raise interest rates to the highest level since 2008 this Friday.

Insiders revealed earlier this month that before Trump's inauguration, Bank of Japan officials believed that unless Trump's return to the White House brought too many negative surprises, the likelihood of a rate hike was high. Additionally, insiders stated that Japanese government officials would also support the Bank of Japan's actions this week after Trump's inauguration ceremony.

If the Bank of Japan announces a rate hike on Friday as the market expects, it will be the third rate hike by the Bank of Japan in less than 12 months. Prior to March of last year, the Bank of Japan had not raised rates for 17 years. Currently, the Bank of Japan is steadily moving towards normalizing its monetary policy, while the Federal Reserve and the European Central Bank are contemplating pausing their easing cycles.

However, even after the rate hike, Japan's borrowing costs will still be the lowest among developed countries. Bank of Japan Governor Kazuo Ueda's vision for further rate hike paths may be a key focus on Friday. Given the global market turmoil triggered by the Bank of Japan's unexpected rate hike last July, Ueda's communication with the market will continue to be closely monitored.

Earlier on Tuesday, the yen was the only currency among the G10 currencies that rose against the dollar, as traders bet that Trump's first wave of tariffs would not prevent a potential rate hike by the Bank of Japan. Chotaro Morita, chief strategist at All Nippon Asset Management Co., stated, "The Bank of Japan will raise interest rates. On Trump's first day in office, there was no major shock, and the stock market did not crash."

Ahead of this week's policy meeting, the Bank of Japan has already sent unusually clear signals indicating that it may take action to raise interest rates. Bank of Japan Deputy Governor Masayoshi Amamiya clearly stated in a speech to Yokohama business leaders last Tuesday that the central bank's policy committee would discuss the possibility of a rate hike this week. Bank of Japan Governor Kazuo Ueda indicated last Wednesday that he would consider a rate hike at this week's meeting and hinted at increased confidence in wage growth, reinforcing market expectations for a rate hike by the Bank of Japan.

Overnight index swaps show that as of Wednesday morning, the likelihood of the Bank of Japan raising rates on Friday exceeds 90%, up from 41% at the end of December last year. Meanwhile, a survey released last week showed that among 53 economists surveyed, about 74% predicted that the Bank of Japan would raise rates by the end of this week's meeting.

In light of these expectations, if the Bank of Japan ultimately does not take action, its signaling strategy may face significant criticism and trigger market turmoil once again.

At the same time, as the policy rate gradually approaches the final rate of 1% anticipated by Bank of Japan policymakers, observers are more likely to look for signs of further rate hikes from the central bank. Hirofumi Suzuki, chief foreign exchange strategist at Sumitomo Mitsui Banking Corporation, stated, "The baseline scenario may be to raise rates once every six months." The Bank of Japan is not expected to raise interest rates quickly.

According to informed sources, the Bank of Japan may also raise its quarterly inflation forecast at this week's meeting. This would indicate that, after living costs have remained near the central bank's target level for the past three years, they will continue to stay around this level for the next two years. Japan's national CPI for December will be released just hours before the Bank of Japan announces its interest rate decision. The market currently expects Japan's national CPI for December to rise 3.4% year-on-year, while core CPI is expected to rise 3% year-on-year.

Japanese Prime Minister Shigeru Ishiba has not yet completed his spending plan. His minority government needs to gain enough support from the opposition to ensure the annual budget passes in March. An interest rate hike by the Bank of Japan this week would fundamentally eliminate the complexities of monetary policy in negotiations.

Leaders of major Japanese corporations have also stated that they do not oppose a possible interest rate hike. Masakazu Tokura, president of Japan's largest business lobbying group, the Keidanren, stated that given that the inflation rate has remained above 2% for some time, it is normal for the Bank of Japan to reassess its interest rate policy. Considering the strong opposition the Bank of Japan faced when raising rates in the first decade of this century, these developments may provide some relief to the central bank.

At the press conference following the interest rate decision announcement, Kazuo Ueda may attempt to retain his options while cautiously advancing the Bank of Japan's first monetary policy normalization efforts in nearly 20 years. Ueda acknowledged that there are challenges in communicating with the market due to the Bank of Japan's uncertainty about its ultimate interest rate.

While 90% of economists believe that Japan's economic conditions justify a rate hike by the Bank of Japan this month, many of them also indicate that the weak yen could be a major reason for raising borrowing costs, and this will also be the case for future rate hikes.

However, expectations for the Bank of Japan's rate hike this week have hardly changed traders' expectations for a weaker yen, as the interest rate gap between Japan and the United States remains significant. Analysis of data from the Tokyo Financial Exchange, the Japan Financial Futures Association, and the U.S. Commodity Futures Trading Commission shows that the total short positions in yen held by domestic retail investors as well as overseas hedge funds and asset management companies have increased by 54%, reaching $13.7 billion.

Daisuke Karakama, chief market economist at Mizuho Bank, stated: "Even if the Bank of Japan raises interest rates, the momentum for a stronger yen may be limited, as the end of rate cuts is becoming a focus for the Federal Reserve. The market will eventually demand another rate hike by selling the yen, and this possibility is quite high."