The Bank of Japan (BoJ) maintained the status quo on its rates on Thursday in the face of a fragile economic situation, an expected decision which caused the yen to stumble against a dollar reinvigorated by the Fed.
After having already raised it twice this year, the BoJ kept its key rate unchanged at 0.25%, arguing “high uncertainties” persistent on activity. A status quo in line with the expectations of the consensus of analysts surveyed by Bloomberg.
In order to counter the return of inflation in the archipelago over the past two and a half years, the Bank of Japan began tightening its rates in March, after ten years of ultra-accommodating monetary policy where they had remained almost zero.
However, even if it remains beyond the 2% target set by the BoJ, the rise in consumer prices in Japan slowed slightly in October (+2.3% year-on-year excluding fresh products), after having already declined in September, making a new turn of the monetary screw less urgent.
Above all, the situation remains precarious: if the BoJ notes in its press release that “the Japanese economy has recovered moderately”it points out the future risks concerning “the evolution of activity, prices and wages”.
GDP (gross domestic product) growth in the world’s fourth largest economy continues to run out of steam, at 0.2% year-on-year in the third quarter, compared to 1.3% over the same period in 2023.
Budget discussions
There is general agreement that BoJ Governor Kazuo Ueda is looking for an appropriate moment: an unexpected rate hike in July took investors by surprise and caused the Tokyo Stock Exchange to plummet, fueling the government’s anger.
A majority of experts are now counting on a next increase in January, after the finalization of the budget by the minority government of Prime Minister Shigeru Ishiba.
His cabinet has just adopted a colossal recovery plan equivalent to 136 billion euros to boost purchasing power in the face of inflation: packages for low-income households, fuel subsidies, reduction in taxable income… But to finance it, the budget must still be revised in depth.
“As the minority government discusses budgetary and tax reforms with opposition forces (in Parliament), it would be a bad time for the BOJ to raise its rate” in December at the risk of cooling activity, estimates Tsuyoshi Ueno, economist at the NLI Research Institute.
Moreover, “the table of salary increases for 2025 will be clearer in January”as business negotiations progress, adds Mr. Ueno interviewed by AFP.
“Uncertainty” Trump
Another unpredictable factor is the economic policy of US President-elect Donald Trump who will take office in January. The increases in customs duties that he promises are likely to cause inflation to rise again and destabilize world trade.
“His decisions on finance, trade, immigration have the potential not only to affect the economy and prices in the United States, but also to have a significant impact on the global economy and the international market of financial capital »warned Kazuo Ueda during a press conference.
“At this time, the uncertainty surrounding the policies of the next (Trump) administration is high, so I think we will have to evaluate the possible effects”he added.
This was all it took to raise the specter of a new status quo from the BoJ in January: in reaction, the Japanese currency fell by 1.3% against the greenback, to 156.77 yen per dollar, at its lowest since July.
The Japanese currency had already slipped overnight after a bout of caution from the American central bank (Fed): it lowered its key rate on Wednesday but now only plans two new cuts in 2025, while it had expected out of four in September.
This dampened market expectations and caused the yen to stall against a suddenly reinvigorated dollar: high American rates maintained for longer will make the dollar more profitable.
However, the BoJ “could tighten its rates (in 2025) more than many anticipate”estimates Marcel Thieliant, of the Capital Economics office.
He highlights the recent strengthening of underlying inflation (excluding energy and food) and the continued rise in prices in services. “And if the salary negotiations result in a further significant increase, labor costs will continue to increase”fueling the rise in prices.