On Wednesday, according to foreign media reports, informed sources revealed that Bank of Japan officials believe there is almost no cost in waiting before raising interest rates, while still remaining open to the possibility of an increase next week, with specific decisions depending on data and market developments.

Informed sources stated that even if the Bank of Japan decides to wait until January next year or a bit longer to raise interest rates, relevant departments believe it will not incur significant costs, as there are signs that the risk of inflation overshooting is low. Meanwhile, they revealed that some officials do not oppose the proposal to raise rates at this meeting.

As a result of the news, the yen experienced significant fluctuations, with the dollar to yen exchange rate briefly dropping to a low of 151.01, before recovering over 150 points to above 152. From the current situation, traders expect there is approximately a 26% chance that the Bank of Japan will increase interest rates by 25 basis points next week.

According to informed sources, officials believe the next interest rate hike is just a matter of time, as the economy and inflation align with their forecasts. The sources indicated that officials can only make a final policy decision on December 19 after carefully evaluating the data and financial markets.

Bank of Japan Governor Kazuo Ueda and the Board of Directors will discuss next week whether there is a need to raise the benchmark interest rate from 0.25%. Since the yen has not shown strong signs of weakness like it did in July, officials determine that the risk of yen depreciation driving up inflation has diminished.

According to informed sources, the data points that Bank of Japan officials will carefully analyze include the US CPI data later on Wednesday, the quarterly Tankan survey report on Friday, and the results of the Federal Reserve meeting hours before the Bank of Japan's policy decision.

The Bank of Japan's interest rate decision will be announced hours after the Federal Reserve makes its decision, which is widely expected to reduce interest rates by another 25 basis points. The divergence in the direction of rates between the two central banks may lead to fluctuations in the yen and Japanese bond yields.

The Bank of Japan's decision to hold steady may weaken the yen, but if the market quickly prices in the possibility of a rate hike in January next year, the yen's decline may be limited.

Regardless of whether the Bank of Japan raises interest rates, Ueda and other officials may provide guidance on the future path of interest rates and conditions that would trigger a hike during the press conference after the meeting.

If the Bank of Japan maintains stable interest rates, Ueda may abandon hawkish hints to avoid triggering an undesirable decline in the yen and explain the key factors that will be carefully reviewed when determining the timing of a rate hike.

In contrast, if the Bank of Japan raises interest rates and leads the market to believe that it will not act arbitrarily but will prudently tighten policy further, Ueda and other officials may communicate a dovish message.

The Bank of Japan may also hint at its policy intentions during Ueda's speech to the Commercial Lobby Group on December 25 and Vice Governor Higo's public appearance on January 14 next year.

The Bank of Japan's quarterly report on regional economies may be released before the policy meeting on January 23-24 next year, which will give the Board of Directors members a clearer understanding of whether wage increases are widening across the country.

Editor/ping