Will the Bank of Japan's interest rate decision next week lead to a repeat of "Black Monday" in global stock markets?

According to the Zhitong Finance APP, the Bank of Japan will hold its last monetary policy meeting of the year next week, at which time it will be determined whether the central bank will announce another interest rate hike in 2024. This specific policy decision will be officially announced a few hours after the Federal Reserve's interest rate resolution. Economists generally expect the Federal Reserve to announce a further rate cut of 25 basis points, while there are significant differences in expectations for the Bank of Japan. However, the majority of economists expect the Bank of Japan to wait until January next year or slightly longer (March or earlier) to announce another interest rate hike.

According to the latest information from informed sources cited by the media, some members of the Bank of Japan's policy committee believe that there is "almost no waiting cost" before announcing another interest rate hike, and they remain open to the possibility of a rate hike next week, with the specific decision depending on data and financial market trends. Informed sources indicate that even if the Bank of Japan decides to wait until January next year or a little longer to raise rates, this policy committee member believes it will not incur significant costs. As a result of this news, the yen experienced significant fluctuations, with the USD/JPY quickly rebounding from a 0.45% drop, and as of the time of writing, the USD/JPY is up 0.5%. Currently, forex traders generally bet that the Bank of Japan is unlikely to raise rates next week. However, it cannot be ruled out that the Bank of Japan may unexpectedly announce a rate hike next week, leaving the market puzzled.

In a rate decision by the Bank of Japan this summer, the central bank "played by its own rules"—unexpectedly announcing a rate hike and making a hawkish statement that greatly exceeded market expectations, which subsequently forced a large-scale unwinding of yen "arbitrage trades" within a few days, leading to the "Black Monday" of global stock markets in early August. On August 5, the yen's exchange rate accelerated upward like stock prices, prompting a rapid unwinding of arbitrage trades, resulting in a sharp decline in global stock markets, with the Japanese stock market plummeting to multiple circuit breakers that day, which has been referred to in the financial industry as "Black Monday" for global stock markets.

Coincidentally, recent statistics show that the yen "arbitrage trades," which once caused turmoil in global stock markets, are now being enthusiastically welcomed by speculative forces and some leveraged hedge funds globally.

According to forecasts and analysis reports from institutions based on statistics from the Japan Financial Futures Association, Tokyo Financial Exchange, and the U.S. Commodity Futures Trading Commission, Japanese retail investors, as well as leveraged hedge funds and some foreign asset management companies, may significantly increase their bearish bets on the yen from $9.74 billion in October to $13.5 billion in November.

Analysts expect these bearish bets to continue to increase in December and next year, mainly due to the significant gap between benchmark interest rates and government bond yields between Japan and the U.S., increased U.S. government borrowing, and relatively low volatility in the foreign exchange market. These conditions make borrowing in Japan at extremely low costs and deploying funds to markets with higher global yields, such as the U.S. stock and bond markets, more attractive.

The global financial market is currently experiencing "underlying currents," with a familiar sense of crisis looming!

The "Black Monday" and the widespread "global stock market sell-off wave" that occurred this summer were precisely due to the unwinding of yen arbitrage trades, which led to a wave of liquidations that severely impacted the market, causing approximately $6.4 trillion to evaporate from global stock markets in just three weeks, with the Japanese blue-chip benchmark—the Nikkei 225 index—experiencing its largest decline since 1987 When the Japanese yen rapidly appreciates, the risk of arbitrage trading based on the yen significantly increases. Since speculators borrow in yen, if the yen appreciates, leveraged forex traders must repurchase yen at a higher price to repay their loans. This can lead to a substantial reduction in their actual returns and even significant losses. When the yen exchange rate appreciates quickly, traders from hedge funds typically choose to close their positions rapidly to offset potential losses, which means selling off large amounts of their liquid Japanese stocks and other risk assets globally to repurchase yen. Moreover, since the yen is traditionally considered a safe-haven currency, some traders may sell stocks on a larger scale to buy yen, thereby avoiding risks amid global market turmoil.

As the "yen arbitrage trading" revives, it coincides with the possibility that the Bank of Japan may announce an interest rate hike in December and potentially release an unexpected hawkish monetary policy path. Additionally, before the Bank of Japan's interest rate decision next week, Federal Reserve Chairman Jerome Powell may send unexpected "dovish" or "hawkish" signals to the market. This macro environment and the undercurrents of trading atmosphere are reminiscent of the period before the global stock market sell-off in early August, highlighting the ongoing risks faced by investors re-engaging in this arbitrage trading.

These extreme uncertainties undoubtedly raise market concerns that the nightmare financial event of "yen arbitrage trading liquidation turmoil," which severely impacted the global stock market in early August, may re-emerge by the end of the year.

The following are the core views of the financial market regarding the Bank of Japan's policy path:

Will the Bank of Japan raise interest rates again?

The Bank of Japan ended its long-standing negative interest rate policy in March and raised its short-term policy target to 0.25% in July. Bank of Japan Governor Kazuo Ueda has repeatedly expressed a "hawkish view," stating that if domestic wages and prices move as expected, they will be ready to raise interest rates again.

There is an increasing belief within the Bank of Japan that the conditions for raising rates to 0.5% are forming. Recent economic data shows that the Japanese economy is moderately expanding, wages are steadily increasing, and the inflation rate has remained above the Bank of Japan's 2% target for more than two years.

However, policymakers at the Bank of Japan seem in no hurry to pull the trigger, as the significant rebound of the yen has somewhat eased domestic inflation pressures, while uncertainties surrounding the next U.S. President Donald Trump's external tariffs and domestic economic policies cast a heavy shadow over the export-dependent Japanese economic outlook.

Whether the Bank of Japan will choose to raise rates again in December or wait until the subsequent meeting on January 23-24 will be a "very close decision," depending on Governor Ueda and each member of the Bank of Japan's Policy Board's confidence in Japan's ability to sustainably achieve the central bank's 2% inflation target.

The central bank will conclude its next two-day monetary policy meeting on December 19, with the subsequent monetary policy decision to be made on January 24. According to a Bloomberg survey conducted before the Bank of Japan's monetary policy meeting in October, over 80% of observers expect an interest rate hike by January It is noteworthy that the Bank of Japan is taking an unusual step, indicating its efforts to improve market communication mechanisms, and this move may suggest that the Bank of Japan will choose to raise interest rates again in January next year, rather than in December this year.

Bank of Japan Deputy Governor Masayoshi Amamiya will deliver an important speech to local business leaders in Yokohama on January 14, followed by a Bank of Japan press conference on the same day. Japanese media generally state that this move is unusual because members of the Bank of Japan's Monetary Policy Committee have never held such activities before the first monetary policy meeting of the year since former Governor Haruhiko Kuroda took office in 2013.

Yuichi Kodama, an economist at Meiji Yasuda Research Institute, stated, "The revised GDP data report for the third quarter again confirms that the economy continues to recover moderately," adding, "The likelihood of the Bank of Japan announcing another interest rate hike in December is over 50%. However, due to the recent slight appreciation of the yen, there is no need to rush, and they may choose to wait until January to announce another rate hike."

What have the policymakers at the Bank of Japan said so far?

Members of the Bank of Japan's policy committee have been "tight-lipped" about the timeline for the next interest rate hike. In a recent media interview, Kazuo Ueda indicated that the next rate hike is imminent but did not explicitly reveal that the Bank of Japan's next rate hike might come this month.

Dovish policy committee member Toyoaki Nakamura expressed no opposition to a rate hike but stated that the timing of raising borrowing costs should depend on economic data rather than merely market expectations. This "ambiguous" statement surprised the market.

Although the Bank of Japan plans to raise rates again before March next year, the recent vague statements suggest that the committee members will collectively discuss the exact timing of the rate hike at the meeting rather than revealing any clear policy inclination to the market in advance.

When do analysts expect the next rate hike to occur?

In a recent Reuters survey of global economists, just over half of the economists expected the Bank of Japan to raise rates in December. About 90% of economists predict that the Bank of Japan will raise rates to 0.5% at some meeting before the end of March.

In contrast, with the Bank of Japan's rare arrangement for the deputy governor to attend a press conference in January, the interest rate futures market currently estimates the likelihood of a rate hike in December at about 30%.

How might the market react?

The Bank of Japan's monetary policy decision will be made a few hours after the Federal Reserve's interest rate decision, with the market generally expecting the Federal Reserve to announce a rate cut. The divergence in interest rate directions between these two major central banks may lead to significant fluctuations in the yen and bond yields.

An announcement of a rate hike by the Bank of Japan could push up the yen. A decision to maintain the status quo could weaken the yen, but if the market quickly digests the possibility of a rate hike being announced in January, the decline of the yen may be limited. If the Bank of Japan announces a rate hike and adopts a hawkish stance, the yen could rise significantly, potentially triggering a new round of "yen carry trade unwinding," which could severely impact global stock markets What other aspects is the market focusing on?

Regardless of whether the Bank of Japan chooses to raise interest rates, Kazuo Ueda is likely to provide guidance on the future interest rate path and action triggers during the post-decision press conference.

If the Bank of Japan maintains stable interest rates, Ueda may throw out hawkish hints to avoid an undesirable decline of the yen and explain the key factors that will be reviewed when judging the timing of interest rate hikes.

In contrast, if the Bank of Japan raises the benchmark interest rate to convince the market that it will not engage in "automatic rate adjustments," but rather take further tightening measures cautiously, Ueda may make "dovish" remarks.

In addition to the interest rate decision, the Bank of Japan will also announce the results of its survey on the pros and cons of various "unconventional monetary easing tools" used in its 25-year battle against deflation, which is another symbolic step towards ending Japan's massive stimulus program.

The review is expected to conclude that, compared to unconventional monetary policy measures, interest rate cuts remain a better tool to address economic stagnation than unconventional policy measures, such as those taken under the "large-scale asset purchase framework" by former central bank governor Haruhiko Kuroda.

If Ueda's remarks are more moderate, or if Federal Reserve Chairman Jerome Powell's comments are more hawkish, along with key data points—such as any implications from U.S. and Japanese economic data—there is a possibility that yen arbitrage trading forces will re-enter the market on a large scale.

What will happen after the Bank of Japan's December meeting? What will the market focus on next?

If the Bank of Japan chooses to raise interest rates, it may keep the benchmark interest rate unchanged at least until April, when the central bank will first announce the latest quarterly forecast data up to the fiscal year 2027.

A decision to maintain the status quo will shift the financial market's attention fully to all key data and financial market events that may affect the January interest rate meeting.

The Bank of Japan may also hint at its policy intentions during Ueda's speech to the Japanese business lobbying group on December 25, as well as during the public appearance of the Bank of Japan's Deputy Governor on January 14, when these two important representatives of the Bank of Japan will personally communicate with the market to manage expectations regarding the Bank of Japan's policies.

The Bank of Japan may release a quarterly report on regional economic developments before the interest rate meeting on January 23-24, which will give the Bank of Japan's policymakers a clearer understanding of whether wage increases are expanding across Japan