Markets seem to be unsure about what to expect from Thursday’s BOJ meeting, with about a 50-50 chance of a rate hike being priced in. This means that there could be a substantial move in yen pairs no matter what happens. Japan is in a particularly delicate economic problem, making a hard balance for the central bank on policy. Market interpretation of the action could drive even larger moves in currency pairs, given the heightened uncertainty.
Economists, markets and even policy officials in Japan all agree that rates need to go up. What’s at stake is the timing. And there seem to be solid arguments for both hiking now, and waiting until the start of next year. In fact, BOJ Governor Kazuo Ueda has appeared on both sides of the issue, giving mixed signals. On the one hand, he made the case that low cost borrowing can’t remain in place. On the other, he expressed concern about Japan’s lack of economic growth that would presumably benefit from lower borrowing costs.
The Trump Problem
The return of Donald Trump to the White House provides an additional uncertainty that is particularly relevant to an export-reliant economy such as Japan. Last time, Trump and then Prime Minister Shinzo Abe had a particularly close relationship which helped address trade concerns as the American president embarked on his signature trade wars. This time, Prime Minister Shigeru Ishiba has admitted to having trouble meeting Trump, which came to light while the latter was hosting Japanese guests at his residence in Mar-a-Lago. Trump did say he would like to meet Ishiba at some point in response to press questions.
Earlier in the week, it was reported that Japan’s trade deficit saw a large drop. This was because of an unexpected large decline in imports, a sign that Japanese businesses and consumers are facing difficulties. But, that could either be because the weaker yen is sapping purchasing power, or businesses are losing confidence. Depending on which of those interpretations you go for, that could mean that raising rates or holding stead is a good idea. That Japanese trade is suffering even before potential Trump tariffs come along could be an additional concern for BOJ meeting officials.
The Inside Scoop
Last week, Reuters reported that the BOJ was more inclined to hold for one more meeting, precisely in order to resolve some of this ambivalence. The next time Japan’s central bank meets is after Trump’s inauguration, which would provide more context for what to expect on the trade front. The bank would also have a raft of fourth quarter data at its fingertips to get a better handle of the economic situation.
In either case, economists say they believe the BOJ meeting will try to couch their actions in caution. Whether that’s for hiking by 25 bps, the expectation is that Ueda will emphasize a slow approach to tightening and might go so far as to suggest that there would be a pause at the next meeting. Markets are still wary of the strong reaction in the yen after the last time the BOJ tightened.
On the other side, a hold might come along with heavy implications that a rate hike is imminent, which could move markets to potentially fully price in a hike for January. Ueda is also likely to not want to provide any assurances for carry traders that could weaken the yen further.
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