The Bank of japan last raised interest rates three times within a year, was in 1989, which marked the turning point of japan's bubble economy era from prosperity to decline. What about this time?
The Governor of the Bank of Japan, Kazuo Ueda, has a wealth of data to support an interest rate hike in December. Should the rates increase, it would mark the first time Japan has tightened monetary policy three times in a year since the peak of the asset bubble in 1989.
The central bank governor seems determined to make a decision at the last moment on December 19. He will closely examine upcoming data, including the Bank of Japan's Tankan survey set to be released on December 13, and will closely monitor the Federal Reserve's interest rate decision, which comes out hours before his own decision.
However, expectations for a recent rate hike from the central bank are warming. In an interview last Saturday, Ueda reiterated that the BOJ would raise rates if the economy performs as expected, and he further stated that the timing of the hike is 'imminent,' as predictions have been proven prescient. Inflation momentum is sustained, businesses are planning investments, and wages are rising.
The annual wage negotiations have also had a rather optimistic start, indicating that the economy is moving toward a positive wage-price cycle, thus the policy meeting in December will be very important.
Most economists surveyed last month expected the Bank of Japan to raise rates before January next year, while Ueda's interview last weekend may have brought some of these opinions forward, as the yield on two-year Japanese government bonds rose to its highest level since 2008 on Monday.
Ko Nakayama, chief economist at Okasan Securities and a former official at the Bank of Japan, said, 'The next rate hike is likely in December. The Bank of Japan has indicated that it will raise rates if the economy meets official forecasts. There is increasing evidence supporting this.'
The last time the Bank of Japan raised rates three times in a year was in 1989. The third hike that year happened on Christmas, and four days later (December 29), the nikkei 225 index reached its peak of 38,957.44. That was the last trading day of the 1980s and a turning point marking the peak and decline of Japan's bubble economy. The cumulative effect of these moves raised the official bank rate from 2.5% at the beginning of the year to 4.25%, and together with warnings from banks about the bubble, this put heavy pressure on the economy and undermined investor confidence, leading to a prolonged adjustment period for the Japanese stock market.
It was not until February of this year, 35 years later, that the Japanese stock market reached its peak again.
In 2024, Ueda faces a drastically different economic landscape. Japan is no longer in any potential competition to become the world's largest economy. Instead, it is an aging economy trying to rebuild the cycle of inflation, economic vitality, and growth. After years of policy experimentation, Ueda hopes the central bank will return to the orthodox method of policy control through interest rates.
In the first full year after taking office in April 2023, Ueda has already made 2024 a milestone year, ending Japan's massive monetary easing program in March and raising interest rates for the first time in 17 years.
The next rate hike will raise the Bank of Japan's policy rate from 0.25% to 0.5%, which will be the highest level since 2008. Although this level remains low compared to borrowing costs of major global peers, the Bank of Japan has maintained a negative interest rate of -0.1% for many years as the last adopter of negative rates in the world, thus this move still represents a significant change.
Although Ueda's unexpectedly swift move to normalization has been smoother than expected, there have also been speed bumps. The second rate hike by the Bank of Japan in July led to a market crash in early August, during which the nikkei/yen recorded its largest single-day decline ever, but the market ultimately stabilized.
Ueda vowed to communicate cautiously before the Bank of Japan takes any further steps. The central bank governor has not adopted the communication style favored by Federal Reserve Chairman Powell, who indicated upcoming rate moves with "the time has come."
Ueda chose to use the term "near" to suggest that action is imminent, rather than to box himself into a precise month.
In a media interview given last Saturday, the governor pointed out that he is closely monitoring wage negotiations and any risks that may arise in the US economy, as US authorities are trying to achieve a soft landing for the economy during a political transition. The strong wage growth achieved this spring was a driving force behind the bank's decision to begin scaling back the stimulus program in March.
In this month's decision day, the interest rate gap between the usa and japan may narrow as both sides take action. As of this Monday, traders believe that the probability of a federal reserve rate cut is about 67%, and the probability of a bank of japan rate hike is about 61%, which has doubled from a month ago.
"If the federal reserve acts while the bank of japan does not, it may reveal the bank of japan's cautious attitude and weaken the yen," Nakayama said. "This could also create chaos and undermine the stability of financial markets."
Some economists state that political factors may delay the bank of japan's rate hike decision until January next year. One reason for pausing the rate hike is Prime Minister Shigeru Ishiba's difficult position after his ruling coalition lost its majority, suffering its worst defeat since 2009 in the October election.
Shigeru Ishiba must seek cooperation from the opposition parties to help pass an additional budget of 14 trillion yen (approximately 93 billion dollars) to fund the economic stimulus plan. The government also needs their support to draft the regular budget and carry out legal amendments.
Economists Ryutaro Kono and Hiroshi Shiraishi from BNP Paribas wrote in a report on Monday: "Shigeru Ishiba's ruling coalition has not obtained a majority in parliament, and his situation is very difficult. If his government cannot communicate properly while balancing other tasks, the bank of japan may decide to wait."
However, Naomi Muguruma, chief fixed income strategist at Mitsubishi UFJ morgan stanley securities, believes that if Ueda thinks that the likelihood of a rate hike in December is low, he may not accept interview requests. The governor of the bank of japan only accepts two important media interviews each year, so the timing of the reports last weekend may be related to this.
Muguruma wrote in a statement: "If the bank of japan is considering a rate hike in January next year, then there is no need for interviews now to indicate a rate hike. The bank of japan is laying the groundwork for another rate hike at the December meeting."
