The speech by the Deputy Governor of the Central Bank attracts attention, the probability of interest rate hikes in Japan in January increases, but "it still depends on Trump"
Barclays, Nomura, and Deutsche Bank all believe that the statement from the Deputy Governor of the Bank of Japan has increased the likelihood of a rate hike by the bank in the near future, but it is still not enough to make a January rate hike a certainty. If Trump's inauguration speech next week does not raise any market concerns, indicating that uncertainty regarding U.S. policy has dissipated, then the Bank of Japan may consider a rate hike in January
The Bank of Japan "turns hawkish," with the probability of a rate hike in January soaring, and next week's Trump inauguration speech becomes the focus.
On Tuesday, Bank of Japan Deputy Governor Masayoshi Amamiya delivered a speech indicating that the outlook for wage increases in fiscal year 2025 has improved, and the uncertainty surrounding the policies of the new U.S. government may have eased, leading to discussions on whether to raise interest rates at the January meeting.
Following Amamiya's remarks, analysts from Barclays, Nomura, and Deutsche Bank released reports stating that his comments have increased the likelihood of a near-term rate hike by the Bank of Japan, but it is still not enough to make a January rate hike a certainty, as the outlook for wages and the uncertainty of Trump's policies may still pose risks.
Public information shows that the Bank of Japan's first monetary policy meeting of the year will be held on January 24 (next Friday), while Trump will officially take office and deliver a speech on January 20 (next Monday).
The day after Amamiya's speech, Bank of Japan Governor Kazuo Ueda publicly stated that a decision on whether to raise interest rates will be made next week, and if the economy and prices continue to improve, a rate hike will occur. On Thursday, media reports also indicated that the Bank of Japan believes there is a high possibility of a rate hike in January, leading to a significant appreciation of the yen, which briefly rose above 155.
Focus on Trump's Inauguration Speech on January 20
Due to the overall positive outlook for Japanese wages and inflation, the market's focus will be on the content of Trump's inauguration speech next week and the market's reaction to it.
Barclays' Naohiko Baba and Ryuichiro Hashimoto stated in their report that Amamiya's speech has made the January Bank of Japan monetary policy meeting appear increasingly "active," but they still maintain the basic expectation of a rate hike in March.
Regarding Trump's inauguration speech, Amamiya's statement was "to help us understand the general direction of Trump's policies." Barclays believes that this baseline is not as "cautious" as Ueda's, indicating that there may be differences of opinion among the members of the Bank of Japan's board.
Nomura holds a similar view, with Kyohei Morita and Uichiro Nozaki stating in their report that Amamiya's remarks are hawkish, and the Bank of Japan may begin discussions on rate hikes at the January meeting, but "there are no signs that a January rate hike has become a foregone conclusion."
Nomura believes that whether the Bank of Japan raises rates in January depends on whether the economy and prices are on the right track, the outlook for wage increases, and the degree of uncertainty in the U.S. economy:
If the Bank of Japan leans more towards considering fundamental conditions (Japanese economy and prices) when making decisions, a rate hike in January is possible;
If the Bank of Japan is more concerned about the uncertainty of U.S. policies, a rate hike is more likely in March.
Deutsche Bank's chief economist Kentaro Koyama raised the probability of a January rate hike by the Bank of Japan from 20% to 40%, but also noted that Amamiya's remarks were not strong enough to make a January rate hike a basic assumption Deutsche Bank stated that considering the Bank of Japan discussed interest rate hikes at its December meeting, it is "natural to discuss interest rate hikes" in January as well. Eisuke Nishimura's intention to mention this may be to raise market expectations for interest rate hikes.
First, we believe that uncertainty regarding Japan's wage outlook still exists, as regional economic reports indicate that some companies are beginning to worry that this year's year-on-year wage growth may slow down.
Second, there seems to be a discrepancy between the views of Eisuke Nishimura and Kazuo Ueda, with the former focusing more on micro-level data such as corporate interviews, while the latter leans towards macro data.
Third, Eisuke Nishimura acknowledged the difficulty and importance of the timing of the decision in his speech, which we believe includes considerations of the political climate.
What circumstances might trigger the Bank of Japan to raise interest rates in January?
Barclays believes that Eisuke Nishimura's remarks indicate that if the uncertainties surrounding Trump's policies can be sufficiently eliminated by then, and the market can avoid severe fluctuations, the Bank of Japan may still raise interest rates in January.
Nomura believes that if Trump's inauguration speech does not trigger any market concerns, it would mean that the uncertainties regarding U.S. policies have dissipated, making it possible for the Bank of Japan to raise interest rates in January.
Deutsche Bank stated that if there are no significant surprises during Trump's inauguration speech, the likelihood of the Bank of Japan raising interest rates in January will increase. Conversely, any unexpected events that increase volatility in financial markets would reduce this likelihood