On the eve of March FOMC: 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 to maintain its benchmark interest rate at 0.5% unchanged in its unanimous decision on Wednesday, in line with market expectations. As an export-oriented economy, Japan is evaluating the impact of the trade protectionist policies that US President Donald Trump may implement on the economy.

This decision comes as the US Federal Reserve (Fed) policy meeting (3/20) is being held, with the market generally expecting the US to also maintain its benchmark interest rate unchanged.

BOJ warns of high uncertainty in the economy

BOJ officials stated: "The Japanese economy is moderately recovering, but there are still signs of weakness in some areas." They also warned that the uncertainty in the global trade situation remains high, and mentioned that the wage and pricing behavior of Japanese domestic companies may be affected.

Market analysts believe that the BOJ's wording may be aimed at the reciprocal tariffs and specific industry tariffs that Trump is expected to announce on April 2. MCP Asset Management Japan analyst pointed out that these policies may impact Japanese export companies, so the central bank chose to maintain the status quo to observe the subsequent developments.

BOJ Governor Kazuo Ueda's press conference draws attention

Investors are closely watching the press conference of BOJ Governor Kazuo Ueda at 3:30 pm (local time) on Wednesday, hoping to find clues about the BOJ's next rate hike.

Although Ueda did not directly mention Trump's tariff plan last week, he expressed "very concerned" about the uncertainty in overseas economic developments. This indicates that the BOJ is carefully evaluating the potential impact of the international economic situation on the Japanese economy.

JPY and stock market react steadily

After the interest rate decision was announced, the JPY/USD exchange rate did not fluctuate much, remaining around 149.46 JPY per 1 USD. At the same time, the Japanese stock market performed positively, with the Nikkei 225 index rising 0.69%.

The market generally believes that the BOJ will further raise interest rates at some point in the future, but analysts have divergent views on the specific timing.

Analysts predict BOJ may hike rates in June

HSBC's Chief Economist for Asia, Fred Neumann, said the BOJ may further raise interest rates in June, stating: "The market forecast may be July, but we believe the possibility of June is greater."

Neumann emphasized that the key to the BOJ's rate hike not only depends on the Fed's policy, but also on whether the evidence of wage growth in Japan is clear enough. "We just saw the major labor unions complete their wage negotiations, but the situation of small and medium-sized enterprises is still unclear, so the BOJ may wait until June to obtain more data before deciding on its actions."

BOJ policy shift: Entering a rate hike cycle after ending large-scale stimulus

In January this year, the BOJ has already raised the short-term interest rate from 0.25% to 0.5%, the highest level since 2008, and has ended its long-term large-scale economic stimulus program. The BOJ has signaled that if economic growth and inflation meet expectations, it will further raise interest rates.

Wage increases, BOJ expects a "virtuous cycle"

The BOJ has long emphasized that it hopes to see a "virtuous cycle", where prices and wages rise in tandem to support economic development.

The Japan Trade Union Confederation (Rengo), the largest labor organization in Japan, announced on Friday that it has secured an average wage increase of 5.46% from April, the largest increase in more than 30 years. The latest data shows that the wage survey covering 760 companies has increased by 0.18 percentage points compared to last year.

It is worth noting that the wage growth rate of small and medium-sized enterprises reached 5.09%, an increase of 0.67 percentage points from the previous year, which is the first time it has exceeded 5% since 1992. In addition, the UA Zensen trade union federation, which represents the retail, catering and other industries, stated that the average salary increase for full-time employees of 139 member companies was 5.37%, slightly lower than the 5.91% in 2024.

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

Japan's inflation rate in January reached 4%, a two-year high. At the same time, household spending in December increased 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 slowing down. The Bank of Japan stated in its latest policy statement: "Inflation expectations have risen moderately, and rice prices remain high, and the effects of the government's measures to curb inflation will gradually diminish in fiscal year 2025."

According to the economic data released last week, Japan's GDP growth rate in the fourth quarter of 2024 was 2.2% year-on-year, lower than the initial forecast, and also did not reach the median level expected by the market. However, the overall economy is still maintaining positive growth, indicating that the Japanese economy is steadily recovering.