MNI POLICY: BOJ Prefers To Wait In Dec, Barring Yen Weakness

Sustained yen weakness toward JPY160 to the dollar would increase the likelihood that the Bank of Japan will raise rates at its final meeting this year, but much of the data Governor Kazuo Ueda wants in order to assess wage-growth momentum will not be available until at least the January meeting, MNI understands.

Ueda has repeatedly cited wage-growth momentum as a key factor, and only initial indications of early wage momentum, including that gathered through hearings with major firms, will be available ahead of the Dec 18-19 meeting. 

A Dec 1 speech by Ueda in Nagoya will provide further clues as to rate hike timing. Officials also want time to be able to review details of the government’s fiscal 2026 budget, including bond issuance plans.

But a sustained depreciation of the yean toward JPY160 would lift import prices and give the BOJ an opportunity to justify a 25-basis-point hike this year, however without this cover Ueda and Deputy Governor Shinichi Uchida would be wary of criticism of further policy tightening from new Prime Minister Sanae Takaichi.

Officials may also calculate that any yen weakness following a December hold might make the government more willing to accept a hike in January, in a similar approach to reducing political resistance as that it took prior to its two previous rate hikes.

The yen weakened sharply last Wednesday to JPY155 for the first time in about nine months after signs that U.S. lawmakers were making progress towards resolving the government shutdown in Washington. It was trading around JPY154.5 to the dollar on Monday.

MARKET PRICING

Although officials concede that economic and price conditions provide some justification for raising rates, with inflation at levels which concern both consumers and businesses, the Bank continues to favour a cautious, gradual approach from a risk-management standpoint amid concern over a slowing U.S. economy and elevated asset prices. 

They also see little difference in terms of macroeconomic impact between a December versus a January move, with a 25bp hike only having a limited effect on inflation and economic activity anyway. Officials also consider that the chances the BOJ will fall behind the curve and be forced to hike sharply to contain inflation are minimal.

Markets currently price a 33% probability for a December increase, but so far officials are unpersuaded that data has provided a decisive case for a hike. 

While a decision to hold in December could trigger some yen selling, officials expect the pressure to be contained as markets would likely price in a January hike, and Ueda is expected to continue to stress that policy will continue to be flexible. (See MNI INTERVIEW: BOJ Dec Hike Needed To Support Yen - Sakurai)