The Bank of Japan may "hold steady" this week? Expectations for interest rate hikes rise in January next year

The Bank of Japan's monetary policy meeting this Thursday is highly anticipated. Although the market generally expects interest rates to remain unchanged in the short term, expectations for future rate hikes are steadily rising.

A recent Reuters survey shows that 95% of economists believe the Bank of Japan will raise its policy rate within the next three months. This figure is significantly higher than the 67% recorded in the October survey.

Citigroup believes the likelihood of a rate hike by the Bank of Japan this year is low, with potential action in January next year; JPMorgan warns that if the Bank of Japan unexpectedly raises rates in December, the yen will experience significant volatility, with the initial decline in the USD/JPY exchange rate potentially between 1% and 2%, and possibly exceeding the decline seen during the rate hike in July this year.

Bank of America, on the other hand, believes that the Bank of Japan may delay a rate hike until March.

Citigroup: The likelihood of a rate hike by the Bank of Japan this year is low, with potential action in January next year

Citigroup's latest economic survey report on Japan indicates that the likelihood of the Bank of Japan raising rates by the end of this year is low, but action may be taken in January next year.

Citigroup believes that while Japanese economic data shows some positive signals and manufacturing confidence has slightly improved, the overall economy is still in a recovery phase.

The business confidence index among large manufacturers has slightly increased, mainly due to improvements in the automotive and production machinery sectors. However, the electrical machinery manufacturing sector has shown weakness due to a slowdown in the technology cycle.

Additionally, Citigroup states that Japanese companies are generally facing serious labor shortages. Japanese companies plan to increase capital expenditures by 10% in the fiscal year 2024, but labor shortages and rising costs may limit the full realization of this plan.

Citigroup believes that considering the easing of inflationary pressures and the uncertainty in the global economic outlook, the likelihood of the Bank of Japan raising rates by the end of this year is low.

However, as the Japanese economy gradually regains vitality, it is expected that the Bank of Japan will take measures to raise rates in January next year to address potential inflationary pressures.

JPMorgan: If the Bank of Japan unexpectedly raises rates in December, the yen will experience significant volatility

JPMorgan's latest report points out that although market expectations for a rate hike by the Bank of Japan this week have cooled, this is mainly due to some unverified media reports, and there remains a possibility of an unexpected rate hike by the central bank.

“Considering the public statements made by Bank of Japan officials, which suggest a continued rate hike, we still maintain our prediction for a rate hike in December.”

JPMorgan states that if the central bank does unexpectedly raise rates, given the current low market expectations for a rate hike, the USD/JPY exchange rate may experience a significant decline, with the initial drop potentially between 1% and 2%, and possibly exceeding the decline seen during the rate hike in July this year. However, compared to July, the current market environment has some differences that may limit the appreciation of the yen. For example, there are currently fewer speculative short positions on the yen in the market, and the Governor of the Bank of Japan is unlikely to make overly hawkish statements.

Bank of America: The Bank of Japan may raise interest rates in January next year, with a possibility of delaying to March

Bank of America Securities' latest research report points out that the Bank of Japan may maintain its policy at the monetary policy meeting in December, while the interest rate hike in January next year may be postponed to March.

Bank of America notes that, based on the statements from the Governor of the Bank of Japan, although economic data is improving, the uncertainty of the global economic situation and concerns about the sustainability of wage growth have led the Bank of Japan to adopt a cautious stance on interest rate hikes.

Bank of America believes that under the basic forecast, the Bank of Japan may raise the interest rate by 25 basis points to 0.5% in January 2025, followed by further increases of 25 basis points in July 2025 and January 2026.

Currently, there are still doubts in the market about whether the Bank of Japan will delay the interest rate hike in January to March. Bank of America believes that the likelihood of a rate hike in January is higher.

The reasons are as follows: First, the Bank of Japan needs more time to gather feedback from businesses to comprehensively assess the inflation situation. The latest business feedback will not be available until January next year.

Secondly, January is the month when the Bank of Japan releases its "Outlook Report," which provides a more suitable opportunity for conveying its policy intentions.

Finally, considering the poor market liquidity at the end of the year, a rate hike in December may trigger market volatility; therefore, from a risk management perspective, a rate hike in January is more prudent.

However, if there are significant changes in U.S. economic policy, the Bank of Japan may postpone the interest rate hike to March.

However, delaying too long also carries risks. Some traders have stated that if the Bank of Japan fails to raise interest rates in January next year, it may trigger a lack of confidence in whether the central bank can actually raise rates, and the yen may return to the high of 150. Bank of America stated:

“If the Bank of Japan postpones the interest rate hike to March, the theme of arbitrage trading is likely to resurface, and the yen may depreciate again to 155 or slightly below the 157 level reached in November.”