Due to weak consumer spending, the cautious decision-making style of the Bank of Japan's governor, and concerns about Trump's economic policies after his potential re-election, the Bank of Japan maintains a cautious attitude towards the timing of the next interest rate hike, with a December hike still uncertain. Last week, Bank of Japan Governor Ueda Kazuo hinted in an interview that December will be a live meeting, stating that another rate increase is imminent. However, he also warned about the uncertainties surrounding the US economy and did not explicitly indicate that the Bank of Japan will raise rates this month, leading to fluctuations in market expectations for a rate hike between December and January.

After leading Japan through a decade of ultra-loose monetary policy, the Bank of Japan is cautious about withdrawing from its easing policies too quickly, especially after a surprise rate hike in July that caused significant volatility in the stock, bond, and currency markets.

The escalating geopolitical tensions and the uncertainties of the policies introduced by the newly elected US President Donald Trump have also prompted global policymakers, including those in Japan, to be cautious about their mandates.

Following the release of strong inflation data in Japan last week, market bets on a December rate hike rose to around 60%, but dropped below 40% on Wednesday as media reports indicated that the Bank of Japan would adopt a more cautious stance, igniting fresh concerns.

Dovish Bank of Japan board member Toyoaki Nakamura did not rule out the possibility of a rate hike in December, stating that the timing of the hike will depend on the data, which has further confused the market.

Three sources familiar with the thoughts of the Bank of Japan indicated that while the Bank's goal is to raise rates around March, it may prefer to maintain flexibility in deciding the exact timing.

One of the sources stated, 'It is clear that the December meeting will proceed as scheduled, and so will other meetings in the coming months.' This source mentioned, 'But from this perspective, it is actually the board of directors' determination,' a view that was also supported by two other sources.

People who know Kazuo Ueda also point out that he was once an economics professor before becoming the governor of the bank of japan, and his decision-making style is to assess the data up to the last moment before drawing conclusions. One anonymous source stated, "He approaches with an academic mindset, carefully studying each piece of data before making a decision." "He is unlikely to signal on matters that have not yet been determined."

After the meeting on December 18-19, the bank of japan will conduct interest rate assessments on January 23-24 and March 18-19.

Insiders indicate that there is an increasing belief within the bank of japan that wages in japan will continue to rise, prompting companies to increase prices, which is a key prerequisite for further rate hikes. Japan's fixed wages have been growing at an annual rate of 2.5-3%. Japan's largest labor union organization has stated that it will seek to raise wages by at least 5% by 2025, approaching this year's significant increase.

However, other data paints a less optimistic picture. Rising labor costs have pushed up service prices, and the inflation rate is expected to remain above the bank of japan's 2% target for more than the next two years.

But other data portray a less optimistic picture. As rising living costs squeeze consumers, household spending in japan fell for the third consecutive month in October. Factory output remained flat, and exports to the usa, japan's largest export market, fell significantly in October due to weak auto shipments.

Data shows that while businesses increased capital expenditure from July to September, recurring profits fell by 3.3% year-on-year due to intensified foreign competition.

Best timing

The bank of japan has already cut stimulus measures twice this year, ending negative interest rates in March and raising short-term borrowing costs to 0.25% in July. Kazuo Ueda has repeatedly stated that if the economic and price trends meet expectations, the bank of japan will continue to raise rates, leading many analysts to anticipate another rate hike before March of next year.

As the Bank of Japan has clearly stated it will adopt a data-dependent approach in formulating policies, each indicator leading up to the December meeting may attract significant market attention. The revised GDP data for Japan's third quarter will be released next Monday, and the Bank of Japan's quarterly 'Tankan' business survey will be published on December 13.

Trump's threat to raise tariffs has introduced new uncertainties into the global outlook. Ueda Kazuhiro stated in an interview with the Nikkei that this factor deserves careful examination.

Some analysts indicate that the exchange rates of the dollar against the yen have detached from the nearly 162 level reached in July, and inflation shows almost no signs of being excessive, thus easing the pressure for the Bank of Japan to raise interest rates immediately.

Mari Iwashita, chief market economist at Daiwa Securities and a senior observer of the Bank of Japan, stated, 'I believe as long as the Bank of Japan can raise interest rates before March, there is no rush to do so.' 'For the Bank of Japan, the question is simply choosing the most appropriate timing among three meetings.'

Editor/Rocky