Bank of Japan Rate Hike Expectations Split Between December and January

IG

The upcoming monetary policy meeting of the Bank of Japan (BoJ) on December 18-19, 2024, is expected to maintain the short-term interest rate at 0.25% for the fourth consecutive time. However, there are indications that the BoJ may provide strong forward guidance hinting at a potential rate hike in January.

Recent comments from BoJ Governor Kazuo Ueda suggest that policymakers are actively considering the timing for the next increase. The Japanese yen has been strengthening, contributing to rising inflation. The latest data shows that Japan's base salary reached a 32-year high in October, aligning with the BoJ's goal of achieving sustained, wages-driven inflation.

Inflation Metrics

Inflation metrics, such as the Tokyo consumer price index (CPI) for November, support the case for a potential rate hike. Headline inflation increased to 2.6% year-on-year, while core inflation rose to 2.2%. The phase-out of utility subsidies and pricing pressures in service sectors indicate a persistent inflationary trend.

The Japanese economy has shown signs of recovery, with the third quarter of 2024 witnessing annualized real GDP growth of 1.2%. This suggests that the economy can absorb further interest rate hikes.

BoJ's Decision

The debate surrounding the BoJ's decision centers on whether it will adopt a "hawkish hold" or a "dovish hike." The central bank's communication strategy has faced criticism in the past, so any decision to maintain the current rate may be accompanied by clear forward guidance for a potential January increase. Alternatively, a surprise rate hike could be tempered with dovish rhetoric to mitigate market volatility.

Foreign Exchange Market

In the foreign exchange market, the USD/JPY currency pair has experienced fluctuations, with several resistance levels posing challenges. A breakdown of the lower channel trendline could lead to a potential bearish trend reversal. On the upside, immediate resistance is identified at the 152.92 level, followed by the November high at 156.74.

Nikkei 225 Index

The Nikkei 225 index has been navigating an ascending triangle pattern since September. A breakout above the upper triangle resistance at the 40,000 level could signal bullish momentum, potentially invalidating a broader diamond top formation. Failure to breach the ascending triangle could indicate a near-term retracement towards the lower triangle trendline at 38,600.

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