Bank of Japan keeps interest rates steady, hawkish opposition from board members By Reuters

Written by Laika Kihara, Makiko Yamazaki

TOKYO (Reuters) – The Bank of Japan kept interest rates unchanged on Thursday but a proposal by a board member opposed to raising borrowing costs showed the bank was still on track to tighten policy early next year.

As widely expected, the Bank of Japan’s nine-member board voted 8-1 to keep the short-term interest rate unchanged at 0.25% in a signal that policymakers prefer to tread cautiously amid uncertainty over the US president-elect’s economic plans. Donald Trump.

However, opposition board member Naoki Tamura, a well-known political hawk, proposed raising interest rates to 0.5% on the grounds that inflationary risks were increasing. His motion was voted down.

The Bank of Japan’s meeting concluded hours after the US Federal Reserve cut interest rates but signaled a more cautious path to easing next year, leading to a sharp decline in global stocks.

“The decision to keep interest rates unchanged was widely anticipated by investors, so I don’t expect a big reaction from the market,” said Ben Bennett, Asia-Pacific investment strategist at Legal and General Investment Management in Hong Kong.

“However, the Fed’s overnight hawkish plan gave the Bank of Japan an option to raise interest rates, and there was a dissenting voice for a 25 basis point hike, so it looks like interest rates will rise as early as 2025.”

The yen fell immediately after the decision, recording its lowest level in a month at 155.28 yen to the dollar, before recovering some of its losses.

Markets are focusing on Bank of Japan Governor Kazuo Ueda’s press conference, expected at 3:30 pm JST (0630 GMT), for clues on whether the bank might raise interest rates in January or March.

In a statement announcing the policy decision, the Bank of Japan said that the Japanese economy is recovering moderately, albeit with some weakness. It maintained its assessment that consumption is increasing moderately as a trend.

The Bank of Japan also reiterated its warning that uncertainty surrounding the Japanese economy and prices remain high.

Many market players see a falling yen among the main incentives for the Bank of Japan to raise interest rates or introduce hawkish communications, as a weaker currency leads to higher inflation through higher import costs.

The Bank of Japan ended negative interest rates in March and raised its short-term policy target to 0.25% in July. He has indicated a willingness to rise again if wages and prices move as expected.

But the central bank has been cautious about the timing of the next rate hike, causing market expectations of the move to fluctuate between December and January.

All participants in a Reuters poll conducted earlier this month expect the Bank of Japan to raise interest rates to 0.50% by the end of March.

Japan’s economy expanded 1.2% year-on-year in the three months through September, slowing from the previous quarter’s 2.2% increase, with consumption rising a weak 0.7%.

Bank of Japan policymakers hope regular wages, which have risen at an annual pace of 2.5% to 3% recently, will continue to increase and support consumption.

There are growing signs that companies are keen to continue raising wages due to intensifying labor shortages, which bodes well for the Bank of Japan’s plan to continue gradually raising interest rates.

But slowing demand in China and uncertainty about the repercussions of Trump’s policies could impact corporate profits and discourage some from raising wages.

After peaking at 4.2% in January 2023, core inflation has slowed steadily to 2.3% in October and shows little sign of rising as price pressure from wages remains moderate.