The timing of the Bank of Japan's interest rate hike remains uncertain: December, January, or March?

According to the Zhitong Finance APP, given the weak consumption, the cautious decision-making style of the Bank of Japan Governor, and concerns about U.S. economic policies after Trump's re-election, the Bank of Japan is maintaining a cautious stance on the timing of the next interest rate hike, with a December rate increase still uncertain. Bank of Japan Governor Kazuo Ueda hinted in an interview last week that December would be a live meeting, stating that another rate hike is imminent. However, he also warned about the uncertainties surrounding the U.S. economy and did not explicitly indicate that the Bank of Japan would raise rates this month, leading to fluctuations in market expectations for a rate hike between December and January.

After leading Japan through a decade of ultra-loose monetary policy, the Bank of Japan is cautious about prematurely withdrawing its easing measures, especially after the unexpected rate hike in July triggered severe volatility in the stock, bond, and foreign exchange markets.

The escalating geopolitical tensions and the uncertainty surrounding the policies of U.S. President-elect Donald Trump have also prompted global policymakers, including Japan, to approach their tasks with caution.

Following the release of robust inflation data in Japan last week, market bets on a December rate hike rose to around 60%, but fell below 40% on Wednesday, as media reports indicated that the Bank of Japan would adopt a more cautious stance, raising new concerns.

Dovish Bank of Japan board member Toyoaki Nakamura did not rule out the possibility of a December rate hike, stating that the timing would depend on data, which further confused the market.

Three sources familiar with the Bank of Japan's thinking indicated that while the central bank aims to raise rates around March, it may prefer to keep its options open regarding the specific timing.

One source stated, "It is clear that the December meeting will take place as scheduled, as will other meetings in the coming months." This source added, "But from this point, it is essentially a judgment of the board," a view echoed by two other sources.

Those familiar with Kazuo Ueda noted that he was previously an economics professor before becoming the Governor of the Bank of Japan, and his decision-making style involves assessing data until the last moment before reaching a conclusion. One anonymous source stated, "He approaches decisions with an academic mindset, carefully studying each piece of data before making a decision." "He is unlikely to signal on matters that are not yet decided."

After the meeting on December 18-19, the Bank of Japan will conduct interest rate assessments on January 23-24 and March 18-19.

Sources indicate that there is growing internal belief within the Bank of Japan that Japanese wages will continue to rise, prompting companies to increase prices, which is a key prerequisite for another rate hike. Japanese fixed wages have been growing at an annual rate of 2.5-3%. Japan's largest labor union organization has stated that it will seek to raise wages by at least 5% by 2025, approaching this year's significant increase.

Due to rising labor costs pushing up service prices, the inflation rate is expected to remain above the Bank of Japan's 2% target for more than the next two years.

However, other data paints a less optimistic picture. Due to the rising cost of living squeezing consumers, Japanese household spending fell for the third consecutive month in October. Factory output remained flat, and exports to the United States, Japan's largest export market, saw a significant decline in October due to weak automobile shipments Data shows that although companies increased capital expenditures from July to September, recurring profits fell by 3.3% compared to the same period last year due to intensified overseas competition.

Best Timing

The Bank of Japan has cut stimulus measures twice this year, ending negative interest rates in March and raising short-term borrowing costs to 0.25% in July. Kazuo Ueda has repeatedly stated that if economic and price trends align with expectations, the Bank of Japan will continue to raise interest rates, leading many analysts to anticipate another rate hike before March next year.

As the Bank of Japan has clearly indicated that it will adopt a data-dependent approach to policy-making, every indicator before the December meeting could attract significant market attention. The revised GDP data for Japan's third quarter will be released next Monday, and the Bank of Japan's quarterly "Tankan" business survey will be published on December 13.

The threat of tariff increases by Trump has introduced new uncertainties to the global outlook, and Ueda mentioned in an interview with the Nikkei that this factor deserves careful study.

Some analysts indicate that the USD/JPY exchange rate has moved away from the nearly 30-year low of around 162 reached in July, and inflation shows almost no signs of overheating, thus easing the pressure for an immediate rate hike by the Bank of Japan.

Mari Iwashita, chief market economist at Daiwa Securities and a senior observer of the Bank of Japan, stated, "I believe as long as the Bank of Japan can raise rates before March, it will not rush to do so. The question for the Bank of Japan is simply choosing the most appropriate timing among three meetings."