BOJ meets for final rate review this year as Trump risk clouds outlook

By Leika Kihara

TOKYO (Reuters) – Bank of Japan policymakers will debate whether conditions are falling in place to raise interest rates at their final meeting this year, a decision complicated by slowing global growth and uncertainty over U.S. president-elect Donald Trump’s policies.

Sources have told Reuters the BOJ is leaning toward keeping interest rates steady at the two-day meeting concluding on Thursday, as policymakers prefer to spend more time scrutinising overseas risks and next year’s wage outlook.

The final decision will depend on the conviction each board member holds on the likelihood of Japan achieving sustained, wage-driven inflation accompanied by solid domestic demand.

A majority of economists polled by Reuters earlier this month expect the BOJ to keep interest rates steady at 0.25% on Thursday. Markets are currently pricing in less than a 20% probability of a rate increase in December..

BOJ Governor Kazuo Ueda will hold a news conference at 3:30 p.m. (0630 GMT) to explain the policy decision.

The BOJ will also release its findings on what worked and didn’t work out of the various unconventional monetary easing tools used in its 25-year battle with deflation, in another symbolic step towards ending its massive stimulus.

The BOJ ended negative interest rates in March and raised its short-term policy target to 0.25% in July. It has signaled a readiness to hike again if wages and prices move as projected.

There is growing conviction within the BOJ that conditions for another hike are falling into place with the economy growing moderately, wages rising steadily and inflation exceeding its 2% target for well over two years, sources have told Reuters.

A closely-watched quarterly survey, released on Dec. 13, showed companies remain upbeat on business conditions and expect inflation to stay above the BOJ’s 2% target in coming years.

But BOJ policymakers appear to be in no rush to pull the trigger with the yen’s rebound from three-decade lows hit in July moderating inflationary pressure from raw material imports.

If the BOJ were to hold off hiking rates on Thursday, markets will be on the look-out for clues on whether it would act in January – or wait until a subsequent meeting in March.

In a media interview last month, Ueda said the BOJ must scrutinise whether wage growth will sustain momentum and warned of big uncertainty over threats of higher tariffs by Trump.

Waiting until the Jan. 23-24 meeting would allow the BOJ to scrutinise a report by its branch managers due on Jan. 9 that will include information on whether small firms in regional areas of Japan would keep hiking rates in 2025.