The Bank of Japan is expected to leave interest rates unchanged this week – CNBC poll

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

A narrow majority of 13 of 24 economists, or 54%, said the Bank of Japan is likely to leave its key interest rate unchanged at 0.25% at the end of its two-day meeting on Thursday. Just as many economists expect the Japanese central bank to raise interest rates in January. The survey was conducted between December 9th and 13th.

The BOJ, which last raised interest rates in July, has signaled its willingness to tighten further if wage growth and prices match its forecasts. In a recent media interview, BOJ Governor Kazuo Ueda said proposed another interest rate hike “approaching in the sense that the economic data is on the right track,” but he also pointed to risks including wage developments next year and possible changes in U.S. economic policy.

Japanese interest rates are the lowest among developed countries, reflecting the BOJ’s longstanding policy of supporting the country’s moribund economy. That policy has kept the yen weak against most major currencies, boosted exports and tourism and boosted the so-called “carry trade,” in which investors borrow yen to bet on higher-yielding assets. These trends could reverse if interest rates rise in Japan while central banks elsewhere begin to cut rates.

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

According to Akira Otani of Goldman Sachs Japan, the BOJ has not yet gained confidence in its outlook. He noted that the central bank lacks sufficient clarity on whether small and medium-sized businesses can sustain wage increases, a risk the BOJ calls crucial to achieving its inflation target. Japanese unions typically negotiate wage increases in the first three months of the calendar year before the fiscal year, which begins in April.

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

“The BOJ’s confusing communications” now point to a likely outcome as the central bank leaves interest rates unchanged and waits for additional information from spring wage negotiations and U.S. political developments, said Shigeto Nagai, head of Japan economics at Oxford Economics , in a note last week.

Regular wages in Japan have risen 2.5% to 3% annually, with inflation remaining above the BOJ’s 2% target for 30 straight months. While authorities are keen to normalize monetary policy, they are also concerned about raising interest rates too quickly after more than two decades of deflation. In fact, Japanese household spending has fallen for three consecutive months since October, while factory output has been volatile.

Teppei Ino, head of Tokyo Global Markets Research at MUFG Bank, also pointed to changing market expectations due to media reports. Overnight swap markets have significantly reduced bets on a rate hike in December, putting a 77% chance of no change as of Monday morning – much higher than the roughly 35% chance of being priced in at the end of November.

“Judging by the (media) reports so far, the likelihood of a rate hike postponement appears to have increased,” Ino told CNBC on Friday.

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

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

Of course, some economists still expect the Bank of Japan to tighten monetary policy this week.

Nomura expects the BOJ to raise its key interest rate by 25 basis points on Thursday, citing fundamentals such as the strong economy and prices. However, it also acknowledged that a rate hike could be delayed due to uncertainties over US policy.

“We believe the BOJ could also decide to postpone a rate hike if it decides to place more emphasis on uncertainties, including U.S. political behavior and market trends (particularly on the U.S.) during the holiday season, when markets tend to be quiet foreign exchange market). ” research analyst Kyohei Morita said in a Dec. 11 note.

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