Bank of Japan's January Meeting in Focus: A Live Decision on Rate Hike
Article published on January 22nd, 2025 10:04AM UK Time
The Bank of Japan (BoJ) is gearing up for a pivotal two-day policy this week, which is widely anticipated to be a live decision on whether to raise its benchmark interest rate from the current 0.25% level. The latest Reuters poll reveals that nearly two-thirds of surveyed economists expect a rate hike, while STIR markets are pricing in an 23% probability of a 25 basis point (bps) increase to 0.55%, aligning with expectations for a policy shift.
In its previous meeting held in December, the BoJ opted to maintain its policy rate at 0.25% in an 8-1 vote, with dissent from Board Member Tamura, who called for a 25bps hike. Following the decision, Governor Kazuo Ueda’s comments downplayed the urgency for an immediate hike, emphasizing that the decision was rooted in the need for more clarity on wage trends, uncertainties in the global economy, and U.S. political developments. Ueda underscored that the January decision would be based on a “holistic” assessment of the data, hinting that the central bank required “one more notch” of information before tightening policy further.
Shifting Market Dynamics Ahead of January Meeting
The likelihood of a rate hike has intensified in recent weeks, driven by surging Japanese government bond yields, with 40-year yields climbing to record highs since their inception in 2007. Reports indicate that the BoJ is considering a January rate increase, though officials are said to be waiting until the eleventh hour to finalize their decision. Additionally, there is speculation that the central bank may revise upward its core-core inflation forecasts for FY24 and FY25, reflecting a continued rise in price pressures.
Recent remarks from officials further support the narrative of a live meeting. Sources suggest a January hike is likely unless significant market volatility arises. The BoJ will also release its Outlook Report, which is expected to contain upgraded inflation forecasts, coinciding with an uptick in the Nationwide Core CPI reading, which accelerated to 2.7% from 2.3% previously.
Market Implications of the January Decision
According to STIR market pricing, the most probable outcome is a 77% likelihood of a 20bps hike to 0.45%. A smaller 23% probability is assigned to a more aggressive move of 50bps, pushing rates to 0.55%. Should the BoJ surprise markets by defying expectations, significant price moves could ensue, particularly given the sensitivity of financial markets to deviations from anticipated policy outcomes.
Governor Ueda’s previous comments about wage negotiation momentum and inflation dynamics suggest that the decision will hinge on whether the latest data sufficiently supports tightening.
As the BoJ faces mounting pressure to normalize policy, traders should prepare for potential volatility, particularly in the yen and Japanese bond markets, as the outcome of next week’s meeting could set the tone for 2025.