Investing.com– The Bank of Japan is set to conclude a two-day meeting on Thursday, with markets split over whether the central bank will raise interest rates further after a historical shift in policy earlier this year.Ā 

The BOJ had raised its twice so far in 2024, ending nearly a decade of negative rates over what it saw as a ā€œvirtuous cycleā€ of wage growth and improved inflation.Ā 

The BOJā€™s benchmark rate rose to 0.25% with its last hike in July. But the bank has since kept rates unchanged, in part due to persistent signs of slowing Japanese economic growth, as well as heightened political uncertainty.Ā 

Wage growth and private consumption slowed in recent months, raising doubts over just how much headroom the BOJ has to keep raising rates. Most notably was recent data that showed the Japanese economy grew less than expected in the third quarter, with growth also slowing sharply from the prior quarter.Ā 

Analysts are split over whether the BOJ will hike rates by 25 basis points during its final meeting for the year. A recent Reuters report said the central bank was more biased towards a hold, and will instead signal a potential hike in early-2025.Ā 

A Reuters poll also showed analysts leaning towards a December hold, but that the BOJ will raise rates by another 25 bps by end-March 2025.Ā 

BOJ Governor Kazuo Ueda had warned in November over keeping borrowing costs too low, signaling that a rate hike was close.Ā  But he had also expressed some caution over the Japanese economy.Ā 

The case for a BOJ holdĀ 

Analysts prediucting a hold said that heightened uncertainties over the Japanese economy could limit the BOJā€™s actions.Ā 

Caution over upcoming policy changes in the U.S., under incoming President Donald Trump, may also stay the BOJā€™s hand. Trump has vowed to impose trade tariffs on several major U.S. trading partners, especially China, which could have some impact on the Japanese economy.Ā 

BofA analysts said that while factors were in play for a December hike, they largely favored January as the ā€œmore natural timingā€ for the BOJā€™s next hike.Ā 

BofA noted that the BOJ was less concerned about imported inflation and yen weakness now than it was in July, although the yen still remained fragile against the dollar.Ā 

ā€œIt seems unlikely that the BoJ-which was, fairly or not, criticized for its role in the market turbulence following its “surprise” July rate hike-would risk a repeat of that experience, especially with liquidity thin during the year-end period,ā€ BofA analysts wrote in a note.

The case for a BOJ hikeĀ 

Analysts predicting a hike said that the BOJ could raise rates by 25 bps amid a recent pick-up in wages, private consumption and inflation, furthering the notion of a ā€œvirtuous cycleā€ that had sparked the BOJā€™s tightening spree this year.Ā 

ANZ analysts said they expected a 25 bps hike, noting improvements in business activity, tighter labor markets and improved business sentiment.Ā 

Expectations of more bumper wage hikes in 2025 could also see the BOJ act preemptively in raising rates now rather than later. Still, ANZ analysts noted that a hike was not a given, especially amid uncertainty over domestic and foreign policies.Ā 

Nikkei, USDJPY muted as decision loomsĀ 

Japanese stocks turned rangebound amid uncertainty over the BOJā€™s decision, with the clocking muted moves so far this week. Japanese stocks are likely to advance if the BOJ holds rates, and could head lower in the event of a hike.

The yen also tread water, with the pair flitting between 153 and 154 yen.Ā 

The yen could firm sharply in the event of a hike, as seen when the BOJ raised rates unexpectedly in July. But the yen has since relinquished most of its gains.Ā 

A hold is likely to elicit more near-term pressure on the yen.


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