A heavyweight "short essay" reveals the Bank of Japan's policy direction for next week: inclined not to raise interest rates

According to the Zhitong Finance APP, today some media released a significant "short article" — that is, the Bank of Japan is inclined to maintain stable interest rates next week. Some media cited five informed sources familiar with the thoughts of the Bank of Japan's policymakers, revealing that most members of the Bank of Japan's committee prefer to keep interest rates stable next week, as policymakers are more willing to spend more time carefully studying risks in overseas markets and clues regarding next year's wage growth prospects in Japan. The Bank of Japan's decision is crucial to the fate of the recently revived yen "arbitrage trading," the "Black Monday," and the widespread "global stock market sell-off wave" that occurred this summer, triggered by the large-scale liquidation caused by the unwinding of yen "arbitrage trading."

Any such decision would increase the likelihood of the Bank of Japan raising interest rates at subsequent meetings in January or March, when more information about next year's wage increases will be available.

Informed sources stated that there is no consensus within the Bank of Japan regarding the final decision, and some members of the Bank of Japan's monetary policy committee still believe that the Japanese economy has met all the conditions for a rate hike in December. The final decision will depend on all committee members' beliefs about the possibility of Japan achieving sustained wage-driven price increases, with a majority of members leaning towards keeping interest rates unchanged next week, according to sources cited by the media.

According to informed sources, policymakers at the Bank of Japan believe that waiting before raising interest rates carries almost no cost, while still remaining open to a rate hike next week, depending on data and market developments. Sources said that even if the Bank of Japan decides to wait until January or longer to raise rates, the authorities believe this will not incur waiting costs, as there are signs that the risk of inflation overshooting is limited.

If upcoming events, such as the Federal Reserve's December rate decision, conclude just hours before the Bank of Japan's rate decision, and if Federal Reserve Chairman Powell's macro-level dynamics trigger another sharp decline in the yen exchange rate, exacerbating inflationary pressures on the Japanese economy, then members of the Bank of Japan's committee may collectively choose to support a rate hike.

However, informed sources indicated that overall, despite Japan's borrowing costs remaining close to zero, many policymakers at the Bank of Japan do not seem eager to pull the trigger, as the risk of inflation overshooting is low.

"Japan does not need to raise interest rates immediately," one informed source stated. Another source mentioned, "Since the inflation rate remains moderate, the Bank of Japan has ample time to carefully review various economic data." This view was supported by two other sources.

The Bank of Japan will hold its last monetary policy meeting of the year on December 18-19, during which the nine-member monetary policy committee will consider whether to raise the short-term interest rate from the current 0.25%.

In a survey conducted by Reuters last month, just over half of the economists expected the Bank of Japan to raise rates in December. About 90% of economists predict that the Bank of Japan will raise rates to 0.5% at some meeting before the end of March. In contrast, the interest rate futures market currently bets on less than a 30% probability of a rate hike by the Bank of Japan in December "Trump Risk" is Imminent

The Bank of Japan is cautious about the timing of its next interest rate hike, leading to fluctuations in market expectations for a rate increase between December and January.

Insiders say that there is growing internal belief within the Bank of Japan that conditions for another rate hike are forming, as Japan's economy experiences moderate growth, wages steadily rise, and inflation has exceeded its 2% target for two years. They indicate that the Bank of Japan may maintain its view that consumption "is moderately growing as a trend," suggesting confidence in the economic outlook.

However, due to the recent rapid rebound of the yen's exchange rate, the inflationary pressure from imported raw materials has eased, thus there is no urgency for a rate hike. This contrasts sharply with the economic conditions faced by the Bank of Japan when it raised rates to 0.25% in July, when the rapid depreciation of the yen pushed up import prices and increased the risk of excessive inflation.

Insiders state that while rising wages have prompted more companies to increase service prices, these measures have not reached a level that would trigger a concerning wage-inflation spiral.

Insiders indicate that taking action to raise rates in December rather than January may give the market the impression that the Bank of Japan is eager to push rates up to a level considered neutral for the economy, which is precisely what it wants to avoid.

The Japanese government still believes that Japan remains in a state of economic stagnation and hopes that the Bank of Japan will act cautiously.

When asked about the December meeting, a senior Japanese government official stated, "The Bank of Japan would do well to delay a rate hike until the economy recovers further."

Insiders say that unless the yen rapidly depreciates again, exacerbating inflationary pressures, many policymakers at the Bank of Japan may prefer to wait for detailed information on whether companies will continue to offer significant wage increases in next year's negotiations with labor unions.

Before the meeting on January 23-24 next year, the Bank of Japan will carefully review comments from corporate executives regarding next year's wage outlook, as well as quarterly regional reports that include information on how small businesses set prices and wages.

Insiders indicate that another reason for Japan's choice to remain silent is the significant uncertainty surrounding the economic policies of U.S. President-elect Donald Trump. Bank of Japan Governor Haruhiko Kuroda also emphasized this risk in a recent media interview. The uncertainty surrounding the tariffs and domestic economic policies of the next U.S. President Donald Trump casts a heavy shadow over the economic outlook for Japan, which is heavily reliant on exports.

Insiders state, "The biggest risk facing the Japanese economy comes from overseas, especially from the Trump administration, as the cooling of global demand due to tariff policies may harm Japanese corporate profits and suppress their willingness to raise wages."

The Bank of Japan's monetary policy decision next week will be officially announced just hours after the Federal Reserve's interest rate decision, with economists widely expecting the Fed to announce another 25 basis point rate cut.

Insiders say that if the Fed unexpectedly maintains its benchmark interest rate and triggers a surge in the dollar index, this may force the Bank of Japan to choose to raise rates to slow the sharp sell-off of the yen and strive to narrow the yield gap between Japanese and U.S. government bonds.

The Bank of Japan ended its long-standing negative interest rate policy in March this year and unexpectedly raised its short-term policy target to 0.25% in July. If wages and prices develop as expected, the Bank of Japan has indicated its readiness to raise rates again and has strengthened its confidence that Japan's inflation rate will remain at 2% for the long term