The Bank of Japan remains as steady as a rock: it has maintained negative interest rates as scheduled and has not released any signals of easing! As a result, the Japanese yen plummeted.

Zhitong App has learned that the Bank of Japan announced on Tuesday that it will continue to implement a negative interest rate policy and did not provide any guidance on whether this policy may be canceled next year. After the decision was announced, the yen depreciated significantly. According to a recent statement, at the end of the two-day meeting, members of the Bank of Japan's Policy Board unanimously decided to maintain the short-term policy interest rate at -0.1% and maintain the yield curve control policy. The upper limit of long-term Japanese government bond yields is referenced at 1%. The forward guidance on monetary policy remains almost unchanged, without specific mention of any prospects related to interest rate hikes and normalization of monetary policy.

Overall, the latest policy choice of the Bank of Japan, known as the "last samurai of negative interest rates," did not surprise the market. Bank of Japan Governor Haruhiko Kuroda will continue to look for more evidence to confirm that wage increases will drive sustained inflation in Japan and completely escape from years of deflation. However, the policy decision to remain unchanged in December is unlikely to quell speculation that the Bank of Japan will eventually raise interest rates, with April being considered the most likely timing. Later on Tuesday, when Kuroda speaks to the media, investors will carefully analyze his remarks for any hints about this timing or any earlier policy actions.

In the latest statement, the Bank of Japan maintains its forward guidance unchanged, stating that inflation expectations are moderately rising and it will continue to patiently maintain its accommodative monetary policy. However, the Bank of Japan slightly adjusted its assessment expectations for consumer spending and business investment with a slightly cautious tone. The Bank of Japan stated that personal consumption continues to grow moderately, removing the word "steadily" from the previous description.

Pay attention to the difference - Japan maintains zero interest rates, while the Fed hints at easing policy next year

As the Bank of Japan did not release any easing signals, the market responded accordingly: the exchange rate of the yen (USD/JPY) depreciated from around 142.64 yen before the decision to 143.79 yen at one point. This move by the Bank of Japan disappointed investors who bet on the yen exchange rate rising, as they were betting that the Bank of Japan would unexpectedly raise interest rates early or at least signal an early rate hike. Last week, after the Fed hinted at a loose monetary policy shift in 2024, the yen exchange rate (USD/JPY) reached a four-month high. The earlier rise in the yen eased some of the pressure on Kuroda. In recent meetings, Kuroda faced the risk of pushing the yen to a 30-year low.

"Some speculate that the Bank of Japan may change its wording today to prepare the market for policy changes in the coming months," said David Forrester, Senior Foreign Exchange Strategist at Crédit Agricole CIB Singapore. "However, the Bank of Japan's forward-looking language remains unchanged, which has put pressure on the yen as the market's pricing for the end of negative interest rate policy in April 2024 appears too aggressive."

The shift towards a dovish stance by the Federal Reserve may further pressure Governor Haruhiko Kuroda as some Bank of Japan observers believe it narrows the window of opportunity for the normalization of monetary policy. If the Bank of Japan's move to end negative interest rate policy triggers a sharp strengthening of the yen, it will reignite deflationary pressures in the Japanese economy. Conversely, if the Bank of Japan hesitates and the US economy's growth expectations quickly heat up after the Federal Reserve begins its rate-cutting cycle, the yen will lose its appeal as a currency investment.

On the other hand, if the Federal Reserve manages to achieve a "soft landing" for the US economy, it will provide crucial support for the global economic growth model and help the Bank of Japan smoothly transition to an accommodative monetary policy. However, the Bank of Japan would miss its best opportunity to boost the yen.

"We do not believe Governor Kuroda will suggest that the Bank of Japan is eager to end yield curve control and negative interest rates. But he may lay the groundwork for a smooth policy transition next year," said Taro Kimura, economist at Bloomberg Economics.

In recent weeks, comments from Bank of Japan officials have sparked speculation about the end of negative interest rates in the near term. However, some of these verbal signals may be more unintentional and subjective rather than carefully planned.

Deputy Governor Ryozo Himino gave an optimistic discussion about the impact of rate hikes in a speech on December 6th. Governor Kuroda has told lawmakers that his job will become "more challenging" starting from the end of the year, further fueling discussions in the market about the appropriate timing to end negative interest rates.

With the ruling party facing a trust crisis and the economic data being unfavorable, the Bank of Japan tends to be cautious

The largest faction of the ruling party, to which Fumio Kishida belongs, has been embroiled in a funding scandal, marking the most serious political turmoil in Japan in decades. Last week, four cabinet ministers resigned, further shaking Kishida's position. In a public opinion poll, Kishida's government had the lowest support rate among Japanese cabinets in 14 years. On Tuesday, prosecutors began searching the offices of some members of the ruling party related to the case.

This instability may give the Bank of Japan more reason to maintain policy stability for a longer period of time. If Governor Kuroda wants to raise interest rates for the first time since 2007, he may be more willing to consider it after sufficient coordination with a stable government. In the past, the exit from ultra-loose policies has been criticized as premature. In another case, the Bank of Japan implemented a policy reversal against the government's opposition, which ultimately proved to be a failed monetary policy.

In terms of economic data, the Japanese economy experienced its most severe contraction since the peak of the pandemic in the last quarter, partly due to weak consumer spending. Consumer spending continues to be below pre-COVID-19 levels as wage growth has failed to keep up with inflation. Since April 2022, the consumer price increase has consistently exceeded the Bank of Japan's target of 2%.

In addition, Japan's Manufacturing Purchasing Managers' Index (PMI) dropped to 47.7 in December, the lowest level since February, comparable to the level when Japan's economy just began to recover from the COVID-19 pandemic in September 2020. Statistical data shows that the index has been below the 50 mark, which is the threshold for expansion and contraction, for seven consecutive months. This important manufacturing data has brought uncertainty to the potential measures of the Bank of Japan to end negative interest rates in the coming year.

The PMI data report also shows that Japanese companies' optimism for the next year has weakened, and their expectations for business activities in Japan have reached the lowest level since March 2022.

Can the expectation of ending negative interest rates in April be realized? The key may lie in wages.

Governor Haruhiko Kuroda has repeatedly emphasized the importance of raising wages next year to promote a positive wage-price cycle. He has hinted on several occasions that any change in monetary policy depends on whether the trend of wage growth in Japan is sustainable and can achieve the Bank of Japan's long-term inflation target of 2%. For years, this negative interest rate policy has squeezed the loan profitability of major banks in Japan.

The preliminary results of the latest spring wage negotiations in Japan will be announced in March next year. This is a key reason why more than half of the economists covered in the latest survey by institutions predict a rate hike in April. After a significant increase in wages this year, large Japanese employers are expected to carry out a new round of wage increases in 2024. This is expected to help boost household spending and provide the necessary conditions for the Bank of Japan to eventually exit from large-scale monetary stimulus.

This year, Rengo, Japan's largest labor union federation, requested companies to raise wages by "around 5%", and the final results showed that the average wages of major companies increased by 3.58%. Rengo has stated that it will request a wage increase of 5% or even higher next year. Another Japanese union, UA Zensen, which represents service industry workers and part-time employees, stated that it will request a 6% wage increase from relevant Japanese companies next year, consistent with this year's request. Among the 10 economists surveyed by financial media, 6 of them predict that the wage increase for major Japanese companies in 2024 will exceed this year's level.

Earlier this month, about two-thirds of global economists surveyed expected the Bank of Japan to end its negative interest rate policy before the end of April. SMBC Nikko, a well-known financial institution in Japan, predicts that the Bank of Japan may announce the end of the Yield Curve Control (YCC) policy and the ultra-loose negative interest rate policy as early as the beginning of 2024. Hideo Hayakawa, a former official of the Bank of Japan, stated in an interview that the Bank of Japan may wait until April to end negative interest rates. He is one of the few economists who correctly predicted Governor Kuroda's unexpected adjustment of the yield curve control in July this year.