We expect the BoJ to stand pat at its 18-19 December monetary policy meeting (MPM). In an interview with the Nikkei newspaper on 30 November, Governor Ueda said that economic data remained on track, but identified three additional checkpoints for the next rate hike: 1) the momentum of FY25 wage negotiations (“Shunto”); 2) the pass-through of wages to service prices; and 3) the outlook for US economic policy. The hurdle to confirming all of these by the December MPM appears high. Instead we believe the 24th Jan meeting might see the 25 bps hike as many uncertainties might have cleared out by then such as Trump's new administration policies, Japan's own fiscal policy conduct as well as some sense on Shunto negotiations for FY25 (ending Mar'26). Recent local economic data has been strong amid persistent inflationary pressures. Japan’s Q3 GDP data strengthens the case for a rate hike, in our view. We see 25 bps hike in the 24 Jan meeting and another 25 bps hike by end CY25. As a general principle, the BoJ is serious about continuing its policy normalization, because nominal policy rates are simply too low vis-à-vis the lowest estimate of real rates at -1%, which implies that the nominal policy rate should be about 1%. Hence we might even see policy rates ending at 1% by end CY25 if local elections due in mid CY25 give a clear mandate to any of the local parties. USDJPY in short term is headed towards mid Nov high of 156.75 & then eventually a drift down to 145 odd levels by mid CY25.
