The Bank of Japan kept interest rates unchanged today but one dissenting board member's proposal to push up borrowing costs showed the bank remains on track to tighten policy early next year.
As widely expected, the nine-member Bank of Japan board voted 8-1 to keep its short-term policy rate unchanged at 0.25% in a sign policymakers preferred to tread cautiously amid uncertainty over US president-elect Donald Trump's economic plans.
However, dissenting board member Naoki Tamura, a known policy hawk, proposed raising interest rates to 0.5% on the view inflationary risks were building. His proposal was voted down.
The Bank of Japan's meeting concluded hours after the US Federal Reserve cut interest rates but signalled a more cautious path of easing next year, sending global stocks sharply lower.
Bank of Japan Governor Kazuo Ueda said real interest rates remained very low but acknowledged fresh risks to the outlook from Trump's proposed trade policies.
"If the economy and prices move in line with our forecast, we will continue to raise our policy rate," Ueda told a news conference. "As for the timing of adjusting the degree of monetary support, we need to scrutinise various data carefully in reaching a decision."
The yen touched a one-month low of 155.48 per dollar after the Bank of Japan's decision to hold rates. The currency is down more than 8% in 2024 against the dollar partly on expectations the bank will go slow in raising ultra-low rates.
Market attention is now shifting toward whether the Bank of Japan will raise interest rates at its next meeting in January, or hold off until March and beyond.
"The decision to keep rates on hold was widely expected by investors, so I don't expect a big market reaction," said Ben Bennett, Asia-Pacific investment strategist at Legal and General Investment Management in Hong Kong.
"That said, the hawkish Fed dot plot overnight gave the Bank of Japan an option to increase rates, and there was one dissenting vote for a 25-bp hike, so it looks like rates will be going up early in 2025."
Many market players see a declining yen among key incentives for the Bank of Japan to hike rates or offer hawkish communication, as the currency's weakness pushes up inflation via higher import costs.
In a statement announcing the policy decision, the Bank of Japan said Japan's economy was recovering moderately albeit with some weakness. It maintained its assessment that consumption was increasing moderately as a trend.
The Bank of Japan also reiterated its warning that uncertainty surrounding Japan's economy and prices remained high.
Aside from the rate decision, Japan's central bank released its findings of a review on the pros and cons of various monetary easing tools deployed during its 25-year battle with deflation.
In the review, the Bank of Japan warned of the side effects of various unconventional monetary easing measures that meant they cannot be a substitute to traditional tools like interest rate cuts.
The Bank of Japan ended negative interest rates in March and raised its short-term policy target to 0.25% in July. It has signalled a readiness to hike again if wages and prices move as projected.
All respondents in a Reuters poll taken earlier this month expect the Bank of Japan to raise rates to 0.5% by the end of March, though they had been divided on whether the move would come in December, January or March.
Japan's economy expanded an annualised 1.2% in the three months to September, slowing from the previous quarter's 2.2% increase, with consumption up a feeble 0.7%.
Bank of Japa policymakers hope regular pay, which has risen at a year-on-year pace of 2.5% to 3% recently, keeps increasing and supports consumption.
There are growing signs companies are keen to continue hiking pay due to intensifying labour shortages, boding well for the Bank of Japan's plan to keep raising interest rates gradually.
But slowing demand in China and uncertainty over the fallout from Trump's policies could weigh on corporate profits and discourage some of them from boosting pay.
