Bank of Japan expected to keep rates on hold this week — CNBC survey

A Japanese national flag flies while a pedestrian walks past the Bank of Japan (BOJ) headquarters in Tokyo, Japan, on Monday, Sept. 14, 2020.

Kiyoshi Ota | Bloomberg | Getty Images

The Bank of Japan (BOJ) is likely to keep its benchmark interest rate unchanged this week as it awaits greater clarity on domestic wages and spending trends as well as policy changes by the incoming administration of U.S. President-elect Donald Trump, according to a survey of economists polled by CNBC.

A slim majority of 13 out of 24 economists, or 54%, said BOJ is likely to keep its benchmark interest rate unchanged at 0.25% at the end of its two-day meeting on Thursday. The same number of economists expect the Japanese central bank to raise rates in January. The survey was conducted between Dec. 9-13.

The BOJ, which last raised rates in July, has signaled its readiness to tighten further if wage growth and prices align with its projections. In a recent media interview, BOJ Governor Kazuo Ueda suggested another rate hike is “nearing in the sense that economic data are on track,” but he also noted risks, including wage trends next year and potential changes in U.S. economic policy.

Japanese interest rates are the lowest among developed countries due to the BOJ’s longstanding policy of supporting the country’s moribund economy. The policy has kept the yen weak against most major currencies, boosting exports and tourism and spurring the so-called “carry trade” when investors borrow yen to bet on higher-yielding assets. These trends could reverse as Japanese interest rates rise while central banks elsewhere begin to lower rates.   

Many economists told CNBC they believe that recent data indicates Japan’s economy is broadly on track to achieve the central bank’s 2% inflation target, driven by wage growth. However, they noted the BOJ might prefer to wait another month to evaluate wage-driven inflation dynamics, focusing on momentum from next year’s spring wage negotiations and Trump’s trade and tariff policies.

The BOJ has yet to gain confidence in its outlook, according to Akira Otani of Goldman Sachs Japan. He noted the central bank lacks sufficient clarity on whether small and medium-sized enterprises can sustain wage increases, a risk flagged by the BOJ as crucial to achieving its inflation target. Japanese unions typically negotiate wage increases in the first three months of the calendar year ahead of the financial year that begins in April.

The view that the central bank is likely to hold rates this week also gained traction after recent media reports suggested policymakers wanted more time to monitor overseas risks and gather additional clues on Japan’s wage outlook.

“The BOJ’s confusing communications” now suggests a likely outcome of the central bank leaving rates unchanged to await additional information from the spring wage negotiations and U.S. policy developments, Shigeto Nagai, head of Japan Economics at Oxford Economics, said in a note last week.

Regular wages in Japan have been growing annually at a rate of 2.5% to 3%, with inflation staying above the BOJ’s 2% target for 30 consecutive months. While authorities are keen to normalize monetary policy, they are also wary of raising rates too quickly following more than two decades of deflation. Indeed, Japanese household spending has declined for three straight months as of October, while factory output has been volatile.

Teppei Ino, head of Tokyo Global Markets Research at MUFG Bank, also highlighted shifting market expectations due to media reports. Overnight swap markets have significantly reduced bets on a December rate hike, assigning a 77% probability of no change as of Monday morning – much higher than the about 35% likelihood of standing pat priced in at the end of November.

“Judging from the (media) reports so far, it seems the likelihood of a rate hike being postponed has increased,” Ino told CNBC on Friday.

“However, considering the current trend of yen depreciation and the upcoming FOMC meeting just before the BOJ meeting, we should keep in mind that there remains a possibility of an abrupt decision to raise rates if the USD/JPY reaches levels like 155,” Ino said, referring to the Federal Open Markets Committee meeting scheduled this week.  

The yen was trading around 154 to the dollar on Monday morning.

To be sure, some economists still expect the BOJ to tighten policy this week.

Nomura expects the BOJ to raise its policy rate by 25 basis points on Thursday, citing fundamentals such as the economy and prices being on track. However, it also acknowledged that a hike might be delayed due to uncertainties surrounding U.S. policy.

“We think the BOJ could also decide to put off any rate hike if it decides to place greater emphasis on uncertainties, including U.S. policy conduct and market trends (in the forex market in particular) during the Christmas season, when markets tend to be quiet,” research analyst Kyohei Morita said in a Dec. 11 note.

The brokerage also pointed to uncertainty around the government’s fiscal support for households as a potential factor that might prompt the BOJ to hold off its rate increase. Prime Minister Shigeru Ishiba, whose government lacks a parliamentary majority, is currently in negotiations with opposition parties over the size of a proposed increase to the minimum annual taxable income threshold.

Many analysts highlighted the Japanese yen as a key factor influencing their outlook on the BOJ’s decisions.

“The most important and likely driver that could change my outlook is the yen,” said Kazuo Momma, executive economist at Mizuho Research, who said the BOJ is likely to stand pat this week and raise the benchmark rate by 25 basis points in January. “Accelerated yen depreciation would upset the public and the federal government, forcing the BOJ to adopt a more aggressive stance on hiking,” he said.

Jun Takazawa, Asia Economist at HSBC, emphasized risks from both directions.

“On one hand, a stronger U.S. dollar driven by fiscal, monetary, and trade policies in the U.S. could weigh on the yen and accelerate the BOJ’s policy normalization process. On the other hand, a weaker yen — within limits — supports Japan’s reflation efforts, so excessive yen strength could delay rate hikes.”

According to CNBC’s survey of 24 analysts, the yen is forecast to average 147.4 against the U.S. dollar by the end of 2025. The dollar rose 2.4% against the yen last week as traders scaled back bets on a BOJ rate hike this month.