The Japanese Central Bank Will Maintain a Stance Of Restraint On Policy But May Hint At a Pivot

In light of weakening consumer sentiment and the unpredictability of the wage outlook for the following year, it is widely anticipated that the Bank of Japan will maintain its ultra-loose policy settings the following week.

In contrast, the focus of the markets is on any post-meeting briefing that Governor Kazuo Ueda might provide regarding the timetable of a withdrawal from negative interest rates.

"Wage negotiations for the following year will likely be productive, but the BOJ will likely need a little more time to determine whether domestic demand becomes a greater driver of inflation," said Shigeto Nagai, chief of Japan economics at Oxford Economics.

"April is the most probable month for an exit," said Nagai, a former BOJ official. "Thereafter, the BOJ will likely direct short-term interest rates within the range of zero to 0.1 percent."

The BOJ is not anticipated to make significant adjustments to its policy guiding short-term interest rates at -0.1% and the yield on 10-year bonds at approximately 0% during a two-day meeting that concludes on Tuesday.

Although the BOJ's quarterly "tankan" survey highlighted the robustness of Japan's corporate sector, certain policymakers argue that the status quo should be maintained due to sluggish consumption indicators and global economic unpredictability.

Positive indications are emerging regarding the wage outlook. "However, substantial evidence that wages will rise has not yet materialized," a source with knowledge of the BOJ's thinking said, and two other sources concurred.

Ueda has stated on multiple occasions that the Bank of Japan should maintain ultra-easy monetary policy until recent cost-driven inflation is replaced by price increases primarily driven by resilient wages and consumption.

However, a rapidly shifting global monetary policy environment, in which U.S. and European central banks have signaled that they are done raising interest rates, could complicate the BOJ's decision.

Wednesday, the Federal Reserve signaled the possibility of multiple rate cuts within the coming year, which, in conjunction with a rate rise in Japan, could precipitously reverse the yen's decline.

Although BOJ officials downplay the potential influence of the Fed's action on their policy decisions, certain analysts assert that an increase in the yen could negatively impact the profits of major manufacturers and deter them from increasing salaries.

The timing of an exit from the Bank of Japan (BOJ) is a matter of contention among its nine-member board. Members are divided as to how long they should wait before concluding that Japan will experience consistent wage growth and inflation that meet the bank's 2% objective.

A November Reuters survey of economists revealed that over 80% anticipate the BOJ to terminate its negative rate policy within the following year, with half of them pessimistic that it will occur in April. Some believe that a policy transition is possible in January.

"What matters is the extent to which the BOJ attempts to signal the possibility of a policy shift in January," according to senior market economist Naomi Muguruma of Mitsubishi UFJ Morgan Stanley Securities.