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The Bank of Japan is expected to raise interest rates from 0.25% to 0.5% on Friday, marking a significant shift towards normalizing its monetary policy after years of negative or zero rates.⁽¹⁾
The expected rate hike is influenced by recent economic data, with statements from BOJ Deputy Governor Ryozo Himino which caused government bond yields to rise to 2008 levels.
BOJ Governor Kazuo Ueda recently indicated the possibility of raising interest rates in the central bank’s upcoming policy meeting, contingent upon continued economic improvement. He emphasized that the decision would be influenced by new quarterly growth and inflation forecasts, as well as economic policies of the incoming U.S. administration and domestic wage negotiations. ⁽²⁾
Japan’s Economic Performance
Governor Kazuo Ueda also mentioned that the BOJ’s decision will heavily depend on continued improvements in economic and price conditions. Japan’s inflation rate is at 2.9%, nearing August 2024’s number of 3% which brought the first-rate hike into effect, supported by rising wages and robust domestic demand. ⁽³⁾
Ueda emphasized the importance of sustained economic growth and wage increases as prerequisites for any policy adjustments. Recent data suggest that Japan’s GDP is on an upward trajectory, with moderate expansion expected to continue into 2025.
Domestic and External Risks
While domestic factors are supportive, external risks could influence the BOJ’s timing. The global economic slowdown, particularly in China’s export-driven economy, poses challenges for Japan’s trade balance.
Uncertainties surrounding U.S. monetary policy and geopolitical tensions may add complexity to the BOJ’s decision-making process. Governor Ueda has acknowledged these risks but has maintained confidence in Japan’s ability to navigate them effectively.
A rate hike by the BOJ could have significant implications for Japan’s financial markets and the global economy. Domestically, higher interest rates may increase borrowing costs, potentially dampening investment and consumption. However, it could also enhance returns on savings and reduce inflationary pressures. A rate hike could strengthen the Yen causing volatility across global markets. ⁽⁴⁾
Technical Analysis
Source: TradingView
USD/JPY pulled back from its recent high of 158.800 where Yen bears drove the price down to its weekly low around 154.700. The MACD shows a bearish crossover which could potentially slow the bullish trend.
A rate hike with hawkish statements from the live meeting may cause the currency pair decline, where bears might target 149.500 as support, potentially reversing the trend. A rate hold or dovish statements could fuel a rebound where buyers may look to target 161 as resistance.
