Next Sunday, the central bank's decision, HSBC: Strong wage growth, economic recovery, interest rate hike is a done deal!

HSBC expects that the Bank of Japan will raise the policy interest rate to 0.5% at the meeting on January 24. The key factor for this decision is the continued improvement in Japan's economic activity and price performance. If the rate hike is delayed further, it may affect the credibility of the policy.

The market generally believes that the likelihood of a rate hike in January is high. HSBC stated that the recently released "Regional Economic Report" shows that companies are increasingly optimistic about wage growth, with more companies explicitly proposing future salary increase plans.

The Deputy Governor of the Bank of Japan confirmed this trend in a speech on January 14 and predicted that wage growth would be strong this year. Governor Kazuo Ueda reiterated this view the following day.

Waiting and watching will bring risks. HSBC stated that although the Bank of Japan may choose to be cautious due to market fluctuations caused by the inauguration speech of the new U.S. government on January 20, delaying action also comes at a cost. Exchange rates and import price pressures may further affect consumption and market sentiment.

The report believes that this spring's "Shunto" wage negotiations are not a necessary condition for a rate hike, and domestic political risks are relatively low in the near term, with budget reviews expected not to have a significant impact on the economy.

At the January meeting, the Bank of Japan may raise its inflation expectations due to factors such as yen depreciation and rising food prices. Although price risks still lean upward, as the domestic economy gradually improves, corporate pricing behavior is also expected to increase. According to data from HSBC's "Asia Economic Quarterly," Japan's economy may achieve a potential growth of 1.3% in 2025, which supports policy normalization, with the terminal rate expected to reach 1.0% in the first quarter of 2026.

Although there is uncertainty about achieving a 1.0% interest rate in the next 1-2 years, the report points out that a rate hike should be the first step for the central bank to fulfill its commitments.

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