Is the Bank of Japan's interest rate hike on Friday a "done deal"? The subsequent interest rate path may become the focus

After Trump took office, the market welcomed the Bank of Japan's first interest rate decision of the year. Will the global financial market face its first "shock wave" of the year?

On Friday morning (January 24), the Bank of Japan will announce its January interest rate decision, and Governor Kazuo Ueda will hold a press conference at 14:30. Since raising interest rates by 15 basis points last July, the bank has maintained its interest rate level unchanged in three consecutive meetings.

Currently, the market has almost fully priced in a rate hike by the Bank of Japan on Friday, with the focus shifting to the market impact and the bank's future rate hike pace.

A Bloomberg survey shows that 74% of economists expect the Bank of Japan to raise rates by 25 basis points on Friday, increasing the rate level from 0.25% to 1%. According to statistics from JP Morgan, expectations for a rate hike by the Bank of Japan in January have risen from 41% on December 30 to 95% on January 22.

Analysts say that if the Bank of Japan raises rates by 25 basis points as expected, it will mark the largest increase since February 2007, indicating further recovery of the Japanese economy.

Strong wage growth and a smooth transition for Trump open the door for a rate hike on Friday

Since the monetary policy meeting at the end of December last year, Kazuo Ueda has repeatedly emphasized that Japan's wage trends and Trump's economic policies after taking office will be important factors in determining the next rate hike. Last Wednesday, Ueda hinted at an event hosted by the Japanese Regional Banks Association that if the economy and prices continue to improve, a rate hike will be considered, and a decision will be made next week.

Analysts believe that the two factors Ueda is concerned about have been largely clarified. So far, Japan's wage growth momentum has been relatively strong, and there have been no significant market shocks since Trump took office.

Insiders previously revealed to the media that as long as Trump does not "create too many negative surprises," Bank of Japan officials believe there is a high possibility of a rate hike this Friday.

UBS Japan economist Masamichi Adachi also believes:

"This decision will largely depend on the previous financial market conditions."

"If there are no shocks, a rate hike is possible."

Considering that a rate hike by the Bank of Japan is almost "a done deal," the focus of the meeting will be on how Ueda plans the subsequent rate hike path. Analysts expect that if Ueda expresses "too dovish" a stance at the afternoon press conference, it may lead to a depreciation of the yen, thereby exacerbating inflation and exchange rate pressures.

It is expected that the Bank of Japan will release its quarterly economic and inflation forecasts on Friday noon. Observers expect the Bank of Japan to raise its inflation forecast for fiscal year 2024 and 2025 by 0.1 percentage points, and if the figures are significantly strong, it will indicate the central bank's greater confidence in achieving sustained inflation upward.

Morgan Stanley: The Trump administration is expected to promote the normalization of Japanese monetary policy

Morgan Stanley believes that the rapid changes in expectations for a rate hike by the Bank of Japan this year are closely related to Japan-U.S. relations. With Trump officially taking office, Japan-U.S. relations are expected to improve, and coupled with the "weak dollar" policy advocated by the Trump administration, it may provide support for subsequent rate hikes by the Bank of Japan. **

Morgan Stanley stated in the report that the Japanese government is considering increasing imports of liquefied natural gas (LNG) from the United States, possibly to demonstrate a willingness to cooperate ahead of the first U.S.-Japan summit since Trump's inauguration (expected in early February). In addition, Japanese companies (such as SoftBank) are considering investment projects in the United States, indicating that Japanese companies are optimistic about the improvement of U.S.-Japan relations and the prospects of the U.S. market.

Analysts believe that with Trump's inauguration, Kazuo Ueda's remarks on the U.S. economic outlook at the press conference will also be closely watched.