Why Did the Bank of Japan Hold Rates Steady in Its Latest Meeting?

TradingKey - For influential global central banks, it’s rare to get two big meetings taking place at the same time. But that’s exactly what happened with the US Federal Reserve meeting on Tuesday to Wednesday overlapping with the two-day meeting of the Bank of Japan (BOJ) on Wednesday to Thursday.

Hot on the heels of that interest rate cut in the US, the BOJ itself decided to hold its key interest rate steady on Thursday (19 December) – meaning there was no cut to its benchmark rate. As a result, its key short-term policy rate remains at an ultra-low level of just 0.25%. 

While opinion was broadly split among economists as to whether the BOJ would raise interest rates at this meeting, markets had largely priced in that the BOJ wouldn’t raise rates. Indeed, rate bets had fallen back in recent weeks heading into the crucial central bank meeting.

So, for investors, what does the latest BOJ decision mean for the Japanese stock market and broader financial markets?

Yen drops past 155 level

Any investor who watches the BOJ’s policy rate will also be studying the Japanese Yen’s strength versus the US dollar. In this context, the latest decision by Japan’s central bank caused the Yen to weaken by around 0.4% versus the greenback and 1 US Dollar can now fetch over 156 Japanese Yen.

That’s the weakest level that the currency has traded at since November and it sits only 3% below the 161 level that it briefly touched in July of this year. Many strategists now believe that the Yen could weaken further given how dovish the BOJ’s official statement was following the decision.

The BOJ’s decision was non fully unanimous among its board (with an 8-1 decision in favour of holding rates steady), potentially giving encouragement to traders who see more weakness in the Yen on the back of continued dovishness from the central bank.

Observers noted that BOJ Governor Ueda, and his colleagues, seem to be in no rush to raise rates given the uncertain global economic outlook and worries whether inflation can be sustained above 2%; although the signs look promising that the inflation that has returned in Japan is stickier in nature.

Japan’s inflation rate is now similar to other global economies

Sources: Bloomberg, Eurostat, Japan’s Ministry of Internal Affairs, US Bureau of Labor Statistics

Being “data dependent” before hiking further

The central bank continues to be “data dependent”, much like the US Fed, when considering whether to raise interest rates. In that sense, market strategists believe the BOJ will look to either late January or mid-March (its next two gatherings) to raise rates again.

One of the main reasons for this is that inflation doesn’t look likely to accelerate and the BOJ can afford to wait. Waiting also gives the BOJ optionality as it looks to assess the impact of any policy pronouncements from the incoming Trump administration in the US. 

In terms of the stock market, the TOPIX Index in Japan pared losses of as much as 1.4% in the morning session to end Thursday’s trading day down only 0.2% after the BOJ’s decision. There was broad relief in the market that the central bank was looking to delay any rate action until the new year.

What to watch to understand the BOJ’s path

Overall, the BOJ will continue to monitor inflation, the Yen’s level, wage growth – with the Shunto wage negotiations set to take place in the spring of 2025 – and the incoming Trump administration. All four of these factors will be important to understanding where the BOJ’s future rate path lies in 2025. 

Investors certainly can’t rule out another hold in January (given the meeting takes place only four days after Trump takes office in the US), meaning a hike in March given there will likely be better visibility over the real impact of any US trade policies by then.