BoJ Preview: 50% Hike, 100% Disappointment

The market has increased pricing in the chance of a hike in the January 23-24 BoJ meeting after supportive remarks from Ueda. However, we have been here before with Ueda emphasizing the "if" and continue to talk about the need for wage to grow sustainably and the uncertainty in U.S.. This does not seem to be a person who is certain nor committed to tighten in the January meeting. Nevertheless, the fifty fifty chance of a full 25bps hike or a compromise of a 10-15bps hike are going to disappoint market participants as the BoJ is clearly not as hawkish as their words.

The labor cash earning has risen to 3% y/y in November, continuously above 2% since May 2024. Early reports are suggesting labor unions will be asking for an even higher wage growth in the 2025 spring wage negotiation. While large enterprises may be able to meet them around the ballpark, smaller business is unlikely to catch up, given their already squeezed profit margin. Only overtime when the gradual change in price setting behavior reaches a certain level, will the wage pressure for smaller businesses ease. Thus, wage growth in 2025 is unlikely to surpass 2024 and the BoJ is likely going to see a milder CPI than their forecast, which is going to limit their magnitude of further tightening. The occasional headline CPI is mostly energy driven but we are also aware of stronger underlying inflation, though it is slower than BoJ forecast.

Another factor the BoJ will be considering apart from the wage/price dynamics, would be Trump's policy. Given the aggressive trading policy Trump is preaching, there is a good chance he will push Japan to act up on the trade agreement he negotiated in his first term. Moreover, the BoJ will likely be hesitant to tighten financial condition if Trump's policy brings great market volatility. 

The BoJ is seeing little risk to the upside from the shade of decades long low inflation/deflation and is in no rush to further tighten. The lack of following through their hawkish rhetoric confirms such even when CPI has been above 2% and wage growth stays strong. We are only seeing a 10bps hike in Q1 and another 15bps in Q2 for 2025. The odds are balanced for a 10bps in the January 23-24 meeting but we remain cautious in reading too much from the BoJ's hawkish comment as they haven't built a strong commitment. Hawkish market participants are going to be disappointed even if BoJ further tightens for their forward guidance will not confirm more hikes coming.