While much of the market’s attention is on Trump 2.0 and what executive order the 47th US President signs next, the Bank of Japan meets overnight to make a decision on interest rates. Policymakers are widely expected to raise rates by a quarter percentage point to 0.5%. If they go with that, then the bank will have raised its policy rate by 60bps in total since March of last year when it started off at -0.1%. That suggests the initial mission to turn away from negative rates is now well underway.
Generally, Donald Trump’s first week in the Oval Office has been relatively quiet, with Day One disappointing those seeking volatility, with domestic policies to the fore. Tariff threats of 25% on Canada and Mexico, and 10% on China have been announced in Trump’s way. But markets have been unruffled with stocks making strong gains while the dollar has corrected. Investors lack clarity on the timing of the threats which means currency market have been rangebound in the past few days.
BoJ eyes higher wages
Markets expect the BoJ to continue its very gradual hiking path with a 25bp hike to 0.50%. They are roughly 80% priced for it. The hike is partly because higher wage growth has become more entrenched in Japan. Core inflation shows continued progress to the BoJ’s inflation goals and expectations point to a third strong yearly gain to the Spring Shunto round of wage negotiations. Should the US impose global tariffs, including on Japan and the Japanese government retaliates, then it may further reinforce imported price pressures and hence further tightening of policy.
Hawkish signals from officials and inflation
Leading BoJ officials have also hinted at a rate move recently with hike pricing doubling in the past week after both Governor Ueda and Deputy Governor Himino formally declared that this meeting is a ‘live’ one at which they would decide whether to hike or not. That’s a pretty explicit signal for a move, barring any disruptive effects from Trump.
The BoJ will also release its Outlook Report containing board members’ median forecasts for real GDP and core CPI. Policymakers are said to be mulling upgrading their inflation forecasts, although this wouldn’t be much of a surprise given the acceleration in the latest nationwide core CPI reading. It rose to 2.7% versus the expected 2.6% and rise from the prior 2.3%. Rising food and oil prices, and the weakening yen will also contribute to upward revisions of the bank’s projections.
Note that we do get the release of core National CPI a few hours before the BoJ meeting. It is expected to have ticked higher to 3.0% in December from 2.7% in November. That is due to the end of the government’s energy subsidy programme, while exports are expected to pick up, which is front loading ahead of Trump tariffs
Yen moves depend on guidance and Trump
USD/JPY has been very quiet this week when one considers the major risk events that have taken place. As a BoJ hike is priced in, volatility could stem from Ueda’s press conference. Will he signal this is a dovish or hawkish hike? The former could push USD/JPY above 158 into intervention territory, while the latter will likely see selling in the major. Going forward, Japanese wage negotiations will be important, as of course will uncertainty surrounding Trump’s policies.