With U.S. President-elect Trump set to take office, the focus is on whether the Bank of Japan will raise interest rates at its January meeting. Former Bank of Japan Monetary Policy Committee member Makoto Sakurai stated in an interview that due to increased uncertainty from Trump's statements, the Bank of Japan might choose to raise rates in March instead of January.
Trump Brings Policy Uncertainty
Sakurai pointed out that Trump's recent comments about annexing Canada into the United States, controlling the Panama Canal and Greenland, and plans to rename the Gulf of Mexico as the "American Gulf," suggest that his new administration may take an aggressive approach to foreign policy. This kind of policy uncertainty might lead the Bank of Japan to delay rate hikes to observe the actual impact on the economy after Trump assumes office.
Increased Likelihood of March Rate Hike
Sakurai believes there is a 70% likelihood of a rate hike in March, while the rationale for a January hike remains insufficient. If rates remain unchanged in January, the dollar-yen rate may break through the 160 mark, providing better decision-making conditions for the Bank of Japan to act in March.
As of now, traders estimate a 50% chance of a rate hike at the Bank of Japan's January 24 meeting, rising to 80% by the March meeting. Moreover, the outcome of spring wage negotiations could be an important catalyst for a March rate hike.
Long-term Rate Path for the Bank of Japan
Sakurai predicts that over the coming years, the Bank of Japan will adopt a slow rate path, raising rates about twice a year while flexibly adjusting the pace according to economic conditions. He emphasized, "The Bank of Japan need not rush its actions." He also noted that by the end of BOJ Governor Kazuo Ueda's term in 2028, the policy rate could approach 2%.
Target Nominal Neutral Rate
An internal BOJ document suggests a range for the nominal neutral rate between 1% and 2.5%, but Sakurai believes this is more about maintaining policy flexibility. He added, "The Bank of Japan definitely has a target rate in mind, but they want to keep room for adjustments."
Market Outlook
Despite increased uncertainty brought by Trump, the alignment between the Japanese economy and the BOJ's policy goals continues to build a solid foundation for future rate hikes. The market will closely watch the January and March meetings, as well as the impact of spring wage negotiations on the BOJ's policy path. Going forward, the pace of BOJ rate hikes will be a key indicator of Japan's economic recovery.
