A dovish hike for the BOJ tomorrow?

Given the state of play and the “leaks” since last week, it looks like a BOJ rate hike is imminent. The question is, how are they going to follow that up ahead of the spring wage negotiations in March?

As things stand, traders are pricing in ~94% odds of a 25 bps rate hike for tomorrow. After, the market pricing shows the BOJ on hold roughly until September or October this year. Taking that into consideration, are we looking for a dovish rate hike by the BOJ?

A more cautious path seems to be a fair assessment of what the central bank is undertaking at the moment. And that roughly translates to a rate hike almost every six months at the balance. That is barring any major economic shocks that is.

Given that traders are pricing in just ~50 bps of rate hikes for the whole year, that shows the tight level of conviction among traders on their view towards the BOJ. That is the BOJ will just be delivering a rate hike once in each half of this year only. So, therein lies the risk for the Japanese yen currency as well.

The balance of probabilities is likely to suggest that downside risk for the yen seems more probable if the BOJ is to stick with the current market path. But if they do switch things up to a more hawkish stance, though unlikely, it will provide scope for the yen to gain.

That being said, I reckon the BOJ might not want to overstep in that regard. After all, they’ve already seen what can happen when they do back in July and early August last year.

Here are what some analysts are saying on the BOJ decision tomorrow (h/t @ MNI – Market News):

“We recently moved up our forecast for the next BoJ hike and see it hiking to 0.5% at the 1/24 MPM, barring
market shocks. Though data since the summer have been “on track” for further BoJ policy adjustment, we had
thought that central bank may prefer to wait until March to deliver its next hike, in order to have more time to assess
the new US administration’s policies. Governor Ueda’s cautious tone at his post-Dec monetary policy meeting
(MPM) press conference reinforced this view.

“Thus, if the BoJ does end up delivering a hike this week, as expected, we forecast the central bank to
follow up with additional hikes in July ’25 and January ’26 (moved up from Oct ’25 and Mar ’26 in our
previous forecasts) for a terminal rate of 1%.” – BofA

“We maintain our call for a 25bp hike at this week’s meeting (followed by further hikes in June and December).
However, a hike is still a relatively close call at this point, and it could be delayed to March. The focus is on whether
US policy (particularly on tariffs) that could be announced after the US Presidential inauguration and prior to the
BoJ meeting will be benign for the Japanese and global economies and not cause turbulence in financial markets.” – Citi

“At the press conference following the December 2024 Monetary Policy Meeting (MPM), Bank of
Japan Governor Kazuo Ueda said that another notch of increased confidence in the outlook would be needed for
the next rate hike, pointing to wage hike momentum in this year’s shunto spring wage negotiations and the direction
of the new US administration’s economic policies and their impact as key points for assessment. Considering this,
we expect the BoJ to decide to raise the policy rate to 0.5% at the upcoming January MPM for three reasons:

“First, the January branch managers’ meeting confirmed that wage hike momentum was spreading broadly
into a wide range of industries and corporate size, albeit with some caution.

“Second, with the inauguration of the new Trump administration on January 20, just before the January
MPM, the direction of the new US administration’s economic policies should gradually become clearer.

Third, the current USD/JPY rate is weaker than before the December 2024 MPM. From a risk
management perspective, postponing the next rate hike could risk further yen depreciation. At the time of
the December 2024 MPM, the yen appreciated to some extent, which is possibly why the BoJ decided
against a rate hike then. However, the yen has weakened since the December meeting. Therefore, we see
less leeway for the BoJ to postpone a rate hike due to uncertainty around the new US administration’s
policies.” – Goldman Sachs

“Deputy Governor Ryozo Himino said in a speech on 14 January that “at the monetary policy meeting to
be held next week, the board will have discussion to decide whether to raise the policy rate or not.” The next day,
Governor Ueda echoed that remark in a speech to the Regional Banks Association of Japan. This led market
participants to price in a greater probability of a rate hike at the January Monetary Policy Meeting. When added to
comments by Economic Revitalization Minister Ryosei Akazawa on 14 January and Finance Minister Katsunobu
Kato the following day indicating they had no intention of opposing a rate increase in January, this would seem to
suggest a hike is imminent.” – Mizuho

This article was written by Justin Low at www.forexlive.com.