Today, there is no suspense about Japan's interest rate hike, but there is suspense about the yen

The data released by Japan's Ministry of Internal Affairs and Communications on Friday showed that Japan's core CPI (excluding fresh food) rose by 3% year-on-year in December, reaching a new high in 16 months. The core inflation rate has remained at or above the Bank of Japan's 2% target level for 33 consecutive months.

This data further solidifies expectations for the Bank of Japan to raise interest rates today. Following the data release, the yen briefly rose against the dollar but then fell back, hitting a low of 156.17, currently reported at 156.05.

As previously pointed out in a report, the Bank of Japan's interest rate hike on Friday was almost fully priced in, with market focus shifting to the future interest rate path of the bank. Currently, the market generally predicts that the Bank of Japan will only raise rates once more this year, and the uncertainty surrounding Trump's policies indicates that the future trend of the yen will be full of suspense.

If the yen appreciates significantly, it could severely impact Japanese exporters like Toyota. Additionally, the uncertainty of U.S. trade policies may also affect the yen. Although the tariffs threatened by President Trump have not yet been implemented, his policy proposals, such as tariffs and tax cuts, could reignite inflation in the U.S., forcing the Federal Reserve to slow down its rate cuts, thereby boosting the dollar and weakening the yen.

Conversely, a depreciation of the yen is usually beneficial for exporters, but if this is due to broader trade disruptions, such benefits may only be temporary. Furthermore, since Japan imports a large amount of energy and food, a weaker yen could push up inflation and increase production costs for imported raw materials.

This means that the Bank of Japan will face a dilemma: either allow the yen to depreciate, which may exacerbate inflationary pressures, or tighten monetary policy further, which could strengthen the yen and worsen the already deteriorating trade situation. Therefore, in today's monetary policy press conference, the statements from the Bank of Japan and Governor Kazuo Ueda must carefully weigh the trade threats from the Trump administration. If tariff policies are indeed implemented, Japan's interest rate decisions will face a more complex balancing challenge.

It is worth noting that the last interest rate hike by the Bank of Japan (in July) triggered a global sell-off, coinciding with weak U.S. employment data, with the Tokyo Stock Exchange index dropping 20% in three days and the Nasdaq index also falling 8% during the same period.

The Bank of Japan has learned from this experience and has cautiously expressed its intentions in recent weeks, avoiding unpleasant surprises like last time. Additionally, a significant portion of the arbitrage trades that were rampant in July seems to have been unwound.

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