The Bank of Japan does not seem in a hurry to raise interest rates.

On December 12, according to informed sources cited by Reuters, five sources familiar with the thoughts of the Bank of Japan stated that the Bank is inclined to keep interest rates unchanged next week, as decision-makers prefer to spend more time examining overseas risks and clues about next year's salary prospects.

A previous article by Wall Street Journal also mentioned that Bloomberg reported citing informed sources that the Bank of Japan believes it is fine to wait a bit more before raising interest rates.

Current overnight index swap pricing shows signs of a delayed rate hike: the possibility of an increase in December is 19%, January is 78%, and March is 95%.

Analysts believe that any such decision may increase the likelihood of the Bank of Japan raising rates at subsequent meetings in January or March next year, which could lead to further declines in the yen. Currently, the yen is trading at 152.5 against the dollar, having previously jumped about 35 points against the dollar before falling back about 25 points.

The decision on whether to raise interest rates remains undecided, and the Bank of Japan continues to be cautious.

Reports indicate that there is currently no consensus within the Bank of Japan on the final decision, which will depend on each Board of Directors member's confidence in the likelihood of Japan achieving sustained, wage-driven price increases.

However, analysts believe that recently, as the yen's rebound has eased the inflationary pressure from raw material imports, many policymakers at the Bank of Japan are not eager to take immediate action, even though Japan's borrowing costs remain close to zero. This is different from the situation in July when the Bank of Japan raised interest rates to 0.25%, as the rapid decline of the yen at that time pushed up import prices, increasing the risk of inflation overshooting.

A source indicated that due to mild inflation, the Bank of Japan can take time to carefully review various data. Although rising wages have prompted more companies to increase service prices, this measure is not yet sufficient to trigger a wage inflation "spiral."

It is worth noting that recently, Bank of Japan Governor Kazuo Ueda emphasized that the uncertainty of President Trump's economic policies in the USA will bring risks, which also encourages the Bank of Japan to adopt a wait-and-see approach. A source stated, "The biggest risk to the Japanese economy comes from overseas," as weak global demand could hurt corporate profits and suppress their willingness to raise wages.

However, some also believe that with moderate economic growth, steady wage increases, and inflation exceeding the 2% target for over two years, there is growing belief within the Bank of Japan that the conditions for another rate hike are maturing.

Additionally, if the Federal Reserve's interest rate decision ends earlier than that of the Bank of Japan, leading to another plunge in the yen and increased inflation pressure, the Board of Directors may support relevant actions, although this possibility is very small.

Analysts' attitudes are divided, with Bank of America warning that the interest rate hike may be postponed until March, leading to a depreciation of the yen.

Some analysts believe that the current situation of the Bank of Japan is not suitable for an interest rate hike.

"If action is taken in December rather than January, it may lead the market to believe that the Bank of Japan is eager to raise interest rates to a neutral level for the economy."

A senior government official also expressed that he believes Japan's economy is still in a stagnant state and hopes the Bank of Japan will act cautiously, "It is best to wait until the economy recovers a bit before raising interest rates."

However, there is a risk of delaying too long. Traders say that if the Bank of Japan fails to raise interest rates in January next year, it may trigger market skepticism about whether the central bank can really raise rates, and the yen could return to a high of 150.

Yesterday, the yen fell to its lowest level in more than two weeks. Analyst Shusuke Yamada from Bank of America warned that:

"If the Bank of Japan postpones interest rate hikes until March, the theme of arbitrage trade is likely to make a comeback, and the yen could depreciate again to 155 or slightly below the 157 level reached in November."

Carol Kong and other Forex Analysts at the Commonwealth Bank of Australia believe that further depreciation of the yen could in turn prompt the Bank of Japan to raise interest rates sooner.

Editor/ping