Market Sentiment Shifts: Balancing Between BoJ Rate Hike Expectations and Patience

Forex - In the upcoming meeting on Thursday, closely watched for its outcomes, expectations are balancing between those who anticipate the Bank of Japan (BoJ) will raise the policy interest rate and those who believe it will prefer to wait.
According to individuals familiar with the BoJ's perspectives, policymakers generally agree that local economic conditions are "on track" for stable inflation supported by wage increases.
Recent inflation and wage data indicate that conditions are favorable for a rate hike, supporting the BoJ's increase of the policy interest rate from 0.25% to 0.50%. However, these individuals mention that the bank may choose to wait if some policymakers opt for greater clarity regarding the outlook for the U.S. economy. Other policymakers believe that the impact of President-elect Donald Trump's economic policies will not become clear until the January meeting, suggesting that the bank does not need to wait for all details.
JPMorgan and Moody's express the view that the BoJ will raise rates, while Goldman forecasts that the December meeting will be skipped.
Benjamin Shatil from JPMorgan stated that the upcoming December Tankan survey will give the Bank a "green light" for a rate hike at the December meeting.
According to analysts at Nomura, the compatibility of Japan's economic and inflation forecasts with the Bank of Japan's predictions clears the path for a rate hike next week.
Sources indicate that policymakers are carefully evaluating how global and local uncertainties will affect wage trends.
One source mentioned that if the U.S. economy sharply deteriorates, it could make Japanese companies hesitant to raise wages. Another pointed out that discussions around tax reform in Japan may provide more clarity early next year, making it more sensible to raise rates since it could impact companies' capacity to increase wages.
Officials stated, "The Bank wants wages to continue rising next year, but the rate of growth does not need to exceed this year's pace."
Japan's largest labor union confederation is seeking an increase of more than 5% in workers' wages next year, following an average increase of 5.10% this year.
The BoJ is preparing to publish a review of its monetary expansion programs over the past 25 years, which may provide a plan for other central banks on how to cope with deflation.
Having pioneered unusual monetary policy measures such as zero interest rates, quantitative easing, and equity purchases, the BoJ is facing continuous price declines and stagnant growth.
Regardless of whether the BoJ raises interest rates or keeps them unchanged this week, it is expected to continue searching for opportunities to raise the policy rate if the economy improves in line with projections.
Before the January meeting, BoJ Vice Governor Ryozo Himino is scheduled to give a speech. The Bank will also hold a meeting of branch managers to discuss regional economies.