The internal divisions within the Bank of Japan are severe, and a rate hike in January is still possible?

The Bank of Japan may still raise interest rates next month, but cautious views dominate.

Last week, the Bank of Japan announced that it would keep interest rates unchanged, but according to the minutes summary released on Friday, there was intense discussion internally about the timing of the next steps.

Some members support a rate hike in January next year, while others advocate waiting longer to observe wage trends and the direction of the U.S. economy under Trump. One member stated:

"The central bank may decide to raise the policy interest rate in the near future, but it is currently necessary to remain patient until the uncertainties in the U.S. economy are resolved."

A January rate hike is still possible, but cautious views still dominate

Although the recent cautious remarks from Governor Ueda Kazuo have lowered market expectations for a rate hike, the minutes show that a January rate hike is still under consideration.

Several members expressed the necessity of a rate hike. One member pointed out:

"Considering that the depreciation of the yen may push up core inflation, it is necessary to preemptively adjust the degree of monetary easing."

Another member believes that the central bank is at a stage where it "should slightly ease off the monetary easing accelerator."

However, cautious views still dominate. One member stated:

"It is necessary to confirm the progress of domestic and foreign economic improvements through data, so it is appropriate for the central bank to temporarily maintain the current monetary policy."

Another viewpoint suggests that since import prices remain stable, yen arbitrage positions have not accumulated excessively, and the current upward inflation risks are not sufficient to warrant a rate hike.

A Reuters poll conducted earlier this month showed that all respondents expect the Bank of Japan to raise rates to 0.50% by the end of March. The Bank of Japan will hold its next interest rate policy meeting from January 23 to 24.

Inflation data supports rate hike rhetoric

According to a government report released on Friday, Japan's December CPI accelerated year-on-year to 2.4%, indicating persistent inflationary pressures. Japan's nationwide core CPI has remained at or above the central bank's 2% target level for two and a half years.

The overnight swap market shows a 42% probability of a rate hike in January, with a 72% probability of a rate hike before March.

One viewpoint in the minutes mentioned that Japan's political situation is a factor closely monitored by the central bank. Many economists believe that the central bank's decision not to act this month was due to concerns about political backlash, as Prime Minister Shigeru Ishiba's minority government struggles to pass the regular budget and tax reforms with the opposition party