BOJ keeps rates steady; dissent signals potential tightening next year

The Bank of Japan kept interest rates unchanged on Thursday but one dissenting board member's proposal to push up borrowing costs showed the bank remains on track to tighten policy early next year. 

As widely expected, the nine-member BOJ board voted 8-1 to keep its short-term policy rate unchanged at 0.25 in a sign policymakers preferred to tread cautiously amid uncertainty over US president-elect Donald Trump's economic plans. 

However, dissenting board member Naoki Tamura, a known policy hawk, proposed raising interest rates to 0.5 on the view inflationary risks were building. His proposal was voted down. 

The BOJ's meeting concluded hours after the US Federal Reserve cut interest rates but signalled a more cautious path of easing next year, sending global stocks sharply lower. 

 

"The decision to keep rates on hold was widely expected by investors, so I don't expect a big market reaction," said Ben Bennett, Asia-Pacific investment strategist at Legal and General Investment Management in Hong Kong. 

"That said, the hawkish Fed dot plot overnight gave the BOJ an option to increase rates, and there was one dissenting vote for a 25-bp hike, so it looks like rates will be going up early in 2025." 

The yen fell immediately after the decision to hit a one-month low of 155.28 to the dollar, before paring some of the losses. 

Markets are focusing on BOJ Governor Kazuo Ueda's press conference, expected at 3:30 p.m. JST (0630 GMT), for clues on whether the bank could raise rates in January or March. 

In a statement announcing the policy decision, the BOJ said Japan's economy was recovering moderately albeit with some weakness. It maintained its assessment that consumption was increasing moderately as a trend. 

The BOJ also reiterated its warning that uncertainty surrounding Japan's economy and prices remained high. 

Many market players see a declining yen among key incentives for the BOJ to hike rates or offer hawkish communication, as the currency's weakness pushes up inflation via higher import costs. 

The BOJ ended negative interest rates in March and raised its short-term policy target to 0.25 in July. It has signalled a readiness to hike again if wages and prices move as projected. 

But the central bank had been guarded about the timing of the next rate hike, causing market expectations of a move to fluctuate between December and January. 

All respondents in a Reuters poll taken earlier this month expect the BOJ to raise rates to 0.50 by end-March. 

Japan's economy expanded an annualised 1.2 in the thre months to September, slowing from the previous quarter's 2.2 increase, with consumption up a feeble 0.7. 

BOJ policymakers hope regular pay, which has risen at a year-on-year pace of 2.5 to 3 recently, keeps increasing and supports consumption. 

There are growing signs companies are keen to continue hiking pay due to intensifying labour shortages, boding well for the BOJ's plan to keep raising interest rates gradually. 

But slowing demand in China and uncertainty over the fallout from Trump's policies could weigh on corporate profits and discourage some of them from boosting pay. 

After peaking at 4.2 in January 2023, core inflation has slowed steadily to hit 2.3 in October and shows few signs of flaring up with wage-driven price pressure remaining moderate.

 

  (Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)