March FOMC Eve: The Bank of Japan keeps interest rates unchanged, and the market focuses on the timing of future rate hikes.

The Bank of Japan (BOJ) decided on Wednesday in a unanimous resolution to maintain the Benchmark Interest Rate at 0.5%, in line with market expectations. As an export-oriented economy, Japan is assessing the potential impact of trade protection policies that may be implemented by U.S. President Donald Trump on its economy.

This decision comes at the time of the Federal Reserve's (Fed) policy meeting (3/20), where the market generally expects the United States to maintain the Benchmark Interest Rate unchanged.

The Bank of Japan warns of high economic uncertainty.

Officials from the Bank of Japan stated, "The Japanese economy is experiencing a moderate recovery, but there are still signs of weakness in certain areas." They also warned that the uncertainty in the global trade situation remains high, and mentioned that the wage and price-setting behavior of domestic Japanese companies may be affected.

Market analysts believe that the Bank of Japan's wording this time may be aimed at the reciprocal tariffs and specific industry tariff measures that Trump is expected to announce on April 2. Analysts at MCP Asset Management Japan pointed out that these policies could impact Japanese export companies, hence the Central Bank has chosen to maintain the status quo to observe subsequent developments.

Bank of Japan Governor Kazuo Ueda's press conference is under scrutiny.

Investors are closely watching the press conference of Bank of Japan Governor Kazuo Ueda at 3:30 PM local time on Wednesday, hoping to find clues about the next interest rate hike by the BoJ.

Ueda Kazuo did not directly mention Trump's tariff plan last week, but expressed that he is "very concerned" about the uncertainties in overseas economic developments. This indicates that the Bank of Japan is carefully assessing the potential impact of the international economic situation on the Japanese economy.

The Japanese yen and the stock market reacted steadily.

After the announcement of the Intrerest Rate decision, the exchange rate of the yen against the US dollar remained largely unchanged, staying around 149.46 yen to 1 dollar. At the same time, the Japanese stock market performed positively, with the Nikkei 225 index rising by 0.69%.

The market generally believes that the Bank of Japan will further raise interest rates at some point in the future, but analysts have differing opinions on the specific timing.

Analysts predict that the Bank of Japan may raise interest rates in June.

HSBC's Chief Economist for Asia, Fred Neumann, stated that the Bank of Japan may further raise the Intrerest Rate in June. He said, "Market expectations might be for July, but we believe the possibility for June is greater."

Neumann emphasized that the key to the Bank of Japan's interest rate hike depends not only on the Federal Reserve's policies but also on whether there is sufficient evidence of wage growth within Japan. "We have just seen major unions complete wage negotiations, but it is still unclear about the situation of small and medium-sized enterprises, so the Bank of Japan may wait until June to obtain more data before deciding on action."

Bank of Japan Policy Shift: Entering the Interest Rate Hike Cycle After Ending Large-Scale Stimulus

In January of this year, the Bank of Japan raised the short-term Interest Rate from 0.25% to 0.5%, the highest level since 2008, ending a long-term massive economic stimulus program. The BoJ has signaled that if economic growth and inflation meet expectations, it will further increase the Interest Rate.

With rising wages, the Bank of Japan anticipates a "virtuous cycle".

The Bank of Japan has long emphasized the hope of seeing a "virtuous cycle," where prices and wages rise in sync to support economic development.

Japan's largest labor organization – the Japanese Trade Union Confederation (Rengo) announced last Friday that it has secured an average salary increase of 5.46% starting in April, marking the largest increase in over 30 years. The union has approximately 7 million members, and the latest data shows that the salary survey covering 760 companies has increased by 0.18 percentage points compared to last year.

It is worth noting that the wage growth rate for small and medium-sized enterprises reached 5.09%, an increase of 0.67 percentage points compared to last year, marking the first time it has surpassed 5% since 1992. In addition, the UA Zensen union alliance, representing industries such as retail and food service, stated that the average salary increase for full-time employees in 139 member companies was 5.37%, slightly lower than the 5.91% expected for 2024.

Japan's inflation hits a two-year high, while the overall economy is still recovering.

Japan's inflation rate reached 4% in January, a two-year high. At the same time, household spending in December grew by 2.7% year-on-year, far exceeding market expectations and marking the fastest growth since August 2022.

However, the year-on-year growth rate of household spending in January fell to 0.8%, indicating that consumption growth may be showing signs of slowing down. The Bank of Japan noted in its latest policy statement: "Inflation expectations have moderately risen, rice prices remain high, and the effects of the government's measures to curb inflation will gradually fade in the fiscal year 2025."

According to the economic data released last week, Japan's GDP year-on-year growth rate for the fourth quarter of 2024 is 2.2%, lower than the initial forecast and also below the median level expected by the market. However, overall it still maintains positive growth, indicating that the Japanese economy is still steadily recovering.

This article on the eve of the March FOMC: The Bank of Japan maintains interest rates unchanged, and the market is focused on the timing of future rate hikes. Originally appeared in Chain News ABMedia.