The firm expects the BOJ to keep its policy rate unchanged at 0.75% in the first monetary policy meeting to start the new year. They also expect the central bank to stick to its existing forward guidance, offering up no major changes in that regard. Barclays notes that the BOJ should still continue to reaffirm hiking rates further “in accordance with improvement in economic activity and prices […] given that real interest rates are at significantly low levels”.
Additionally, they point out that the selloff in the yen currency will also be a factor in the central bank’s decision.
“Both the government and the BOJ are wary of JPY depreciation, but the BOJ aims to avoid rate hikes that appear driven primarily by FX considerations.”
Well, they aren’t wrong there. A pressure-driven move to raise interest rates, however it may be disguised, won’t go down all too well if the fundamental drivers are still working against the currency. The Takaichi trade and fiscal risks remain the main issue:
That being said, Barclays does expect the BOJ to still want to flaunt its flexibility on policy options. That despite pressure from the government in not wanting the central bank to raise interest rates further for the time being. The Takaichi administration just simply does not want policymakers to take action that will run against her fiscal plans but at some point, will it be necessary just to counteract the yen depreciation? We shall see.
In any case, Barclays notes that: “We expect the growth and inflation scenario to take on a somewhat positive tone to set the stage for flexibly raising rates going forward.”
So essentially, they are anticipating the BOJ to keep a more bullish outlook ahead of the spring wage negotiations in March in order to tee up a potential rate hike then.
