The Bank of Japan continues to "stay put" in December, in line with expectations

On Thursday morning, December 19, the Bank of Japan announced that it would maintain the benchmark interest rate at 0.25%, in line with market expectations. The Bank of Japan voted 8-1 to keep the rate unchanged, with committee member Tamura voting against it, suggesting a rate hike.

The Bank of Japan reiterated that the inflation trend seems to align with its target for the latter half of the outlook period, indicating that the economy is developing in the expected direction, which is a prerequisite for a rate hike.

Additionally, the Bank of Japan also released the results of a survey on the advantages and disadvantages of various unconventional monetary easing tools used in its 25-year battle against deflation, marking another symbolic step towards ending its large-scale stimulus measures.

After the announcement, the dollar rose nearly 60 points against the yen in the short term, currently reported at 155.32.

JP Morgan warned that if the Bank of Japan unexpectedly raises interest rates in December, the yen will experience significant volatility, with the initial decline in the dollar-to-yen exchange rate potentially between 1% and 2%, possibly exceeding the decline seen during the rate hike in July this year.

The decision to hold steady highlights policymakers' inclination to take more time to assess whether wage increases will broaden and their determination to keep inflation near the long-term target of 2%. The market had almost fully priced in this decision to "hold steady," with the focus shifting to forecasts for inflation and the economy, as well as relevant statements regarding the next rate hike.

Uncertainty Regarding Economic and Price Outlook Remains High

The Bank of Japan stated that uncertainty regarding Japan's economic and price outlook remains high.

Regarding future CPI forecasts, the Bank of Japan indicated that the underlying CPI is expected to gradually rise, with core CPI recently in the range of 2-2.5%. During the assessment period in the second half of the year, prices will remain consistent with the target level, influenced by government measures and oil prices.

As for the economic forecast, private consumption is expected to grow moderately, and the Japanese economy is experiencing a mild recovery, but there are still some weaknesses. Economic growth is expected to remain above potential levels.

Regarding the recent decline of the yen, the Bank of Japan stated that due to changes in corporate wages and pricing behavior, the impact of foreign exchange fluctuations on inflation may be greater than in the past. It is necessary to carefully examine foreign exchange, market trends, and their effects on the Japanese economy and prices.

At the same time, the Bank of Japan warned that the interaction of policies with stocks and exchange rates carries "high uncertainty."

Easing Policy Insufficient to Anchor Inflation at 2%

This time, the Bank of Japan also released a review report on its monetary easing policy.

The report pointed out that since 2016, long-term interest rates have declined by about 1 percentage point. The impact of large-scale monetary easing on GDP is between +1.3% and +1.8%, and the impact on CPI is between +0.5 and +0.7 percentage points.

However, compared to conventional monetary policy measures, the quantification of the effects of easing policies is uncertain, which has affected inflation expectations to some extent, but is insufficient to anchor inflation at the 2% level The Bank of Japan should continue to implement monetary policy from the perspective of achieving a stable 2% price stability target. When considering future monetary policy actions, no specific measures should be ruled out at this point.

Expectations for Interest Rate Hike in January Next Year Rise

With no hope for an interest rate hike this year, the market is placing its expectations on next year.

Kazuo Ueda is looking for the right timing for a third interest rate hike, and recent economic indicators show that inflation trends are consistent with the Bank of Japan's forecasts. January next year has become the time most market participants are willing to bet on for the next interest rate hike, and this month's vote against maintaining interest rates may keep expectations for a rate hike next month high.

Citi believes that the Bank of Japan may take action in January next year. As the Japanese economy gradually recovers, it is expected that the Bank of Japan will implement interest rate hikes in January next year to address potential inflationary pressures.

Bank of America believes that the likelihood of a rate hike in January is higher. January is the month when the Bank of Japan releases its "Outlook Report," which provides a more suitable opportunity to convey its policy intentions. If there are significant changes in U.S. economic policy, the Bank of Japan may postpone the interest rate hike to March