Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
The Bank of Japan (BOJ) headquarters in Tokyo, Japan on Thursday, October 31, 2024. The Bank of Japan kept its benchmark interest rate unchanged while maintaining its view that it is on track to meet its inflation target, an outlook that points to the possibility of another rate hike in the coming months.
Getty Images
The Bank of Japan kept its benchmark interest rate steady at 0.25% on Thursday, opting to take time to assess the impact of financial and currency markets on economic activity and prices in Japan.
The yen weakened 0.3% against the dollar after the rate decision, trading at 155.42 and touching a one-month low. Meanwhile, that of the country Nikkei 225 was down 0.85%.
The decision to hold rates surprised economists polled by Reuters, who had expected a 25 basis point hike. Next to the United States, on Wednesday the US Federal Reserve cut rates by 25 basis pointsbringing the federal funds rate to 4.25%-4.5%.
The BOJ said in its statement that the decision to hold was an 8-1 split decision, with board member Naoki Tamura advocating for a 25 basis point hike.
The central bank noted, however, that “there remain high uncertainties surrounding Japan’s economic activity and prices.”
“In particular, with business behavior shifting more towards rising wages and prices recently, exchange rate developments are more likely than in the past to affect prices,” added the bank
Analysts at investment bank Credit Agricole Securities Asia said the decision to leave rates unchanged was due to the BOJ’s inability to overcome government opposition to a third rate hike amid growing concerns that the real GDP growth would be negative in 2024.
GDP of Japan has seen a year-on-year contraction in the first two quarters of this year, posting a gain of just 0.5% in the quarter that ended in September.
The BOJ’s decision coincided with a CNBC poll, which showed 13 out of 24 economists expected the BOJ to keep its key interest rate on hold in December before raising the rate at its next meeting in January.
The survey was conducted between December 9 and 13, before the Fed signaled that there would be fewer rate cuts in 2025.
The BOJ “will resume its tightening cycle soon,” Marcel Thieliant, head of Asia-Pacific at Capital Economics, said in a statement after the decision. Capital Economics expects a rise in January after the arrival of a new set of economic forecasts.
Thieliant added that “it’s worth noting that, unlike in October, the decision to leave rates on hold was not unanimous,” pointing to Tamura’s vote to raise rates to 0.5%.
Economy still resilient
Recent economic data from Japan still supports the case for a rate hike. General inflation in October reached 2.3%the 30th consecutive month that inflation has exceeded the BOJ’s 2% target. November inflation data will arrive on Friday.
Business sentiment among large Japanese companies was also higher than expected latest BOJ Tankan surveywith the index of large manufacturing firms rising to 14 in the quarter ended December, up from 13 in the September quarter and beating the 12 expected by economists polled by Reuters.
The index tracks business sentiment in the country among large companies and contributes to the BOJ’s considerations when forming monetary policy. A higher number means that optimists outnumber pessimists, and vice versa.
In a Dec. 13 note, Bank of America analysts said the December Tankan survey indicates the Japanese economy remains resilient.
They added that “this also confirms that the economy and inflation are trending in line with the BoJ’s baseline scenario (which is its prerequisite for raising interest rates).”
However, this does not mean that the need for a rate hike is urgent. Analysts said imported inflationary pressure is easing, while businesses’ medium-term inflation expectations remain stable despite the looming start of President-elect Donald Trump’s administration and the risk of trade tariffs .
