Trump allows Bank of Japan to raise interest rates

(Bloomberg) -- Bank of Japan Governor Kazuo Ueda will assess the need for a rate hike on Friday, barring a market shock from Donald Trump’s first days in the White House, amid growing expectations for a rate hike.

While the rest of the central banking community has been watching the pace of rate cuts, especially from the Federal Reserve, Ueda and his board are moving in another direction as they look to gradually pull Japan back toward traditional policy settings.

After decades of price weakness and sluggish economic growth, Japan appears to be on the verge of achieving stable inflation and steady wage growth, allowing the Bank of Japan to push borrowing costs up to levels seen in other major economies.

About 90% of economists surveyed by Bloomberg this month said prices and economic conditions justified raising interest rates from 0.25%. About three-quarters of economists surveyed expect the central bank to take action this week. Overnight swaps trading on Friday briefly showed traders were almost fully pricing in a January rate hike.

Bloomberg reported on Thursday, citing people familiar with the matter, that as long as Trump does not cause too many negative surprises immediately, Bank of Japan officials also believe there is a good chance of raising interest rates. A possible upward revision to price forecasts and strong wage growth expectations are among the factors supporting the move, people familiar with the matter said.

Both Ueda and his deputy Ryozo Himino said they would consider the need to raise borrowing costs at an upcoming meeting, and the report further fueled expectations of an upcoming rate hike.

Some BOJ watchers interpreted the comments as a hint that action is brewing, as senior central bankers try to increase the clarity of their communications. Some analysts blamed a lack of messaging ahead of a July interest rate hike for the global market meltdown over the summer.

Economists point to the yen as another factor. The yen has been hovering near 160 per dollar, prompting billions of dollars in market intervention last year to support the yen. A rate hike would narrow the gap between U.S. and Japanese interest rates, boosting the currency.

"Recent signals from BOJ officials to raise interest rates are supporting the yen. In the longer term, rising Japanese interest rates and strong economic growth may also dampen yen selling narratives."

——Taro Kimura, senior economist in Japan. For the full analysis, click here

So what could stop Ueda? Economists say potential market turmoil triggered by Trump could give the Bank of Japan reason to wait a little longer. Widespread tariffs are one of the main concerns for all major U.S. trading partners, including Japan, and the president-elect is likely to issue a series of executive orders on the first day of his second administration.

In a potential delaying factor closer to home, more information on the annual wage agreement will be released in March if Ueda seeks clearer wage trends that support price-steady growth. Meanwhile, Prime Minister Shigeru Ishiba has no guarantee he can pass the annual budget without the support of at least one opposition party that is wary of raising interest rates before March.

Still, after clear signals from Ueda and Kino and huge expectations for a rate hike, the Bank of Japan will face more problems with its communication strategy if it doesn't act this time.

Elsewhere, Trump's inauguration will set the tone for financial markets, eclipsing the World Economic Forum in Davos, where he is expected to speak via video on Thursday. The January global purchasing managers index will also attract attention.

Click here to see what happened over the past week, and here's our summary of what's coming to the global economy.

United States and Canada

Trump will be sworn in and deliver his inaugural address indoors on Monday as the nation's capital faces temperatures of 22 degrees Fahrenheit (-6 degrees Celsius). Shortly thereafter, he is expected to issue a series of executive orders that could include rolling back the Biden administration's immigration policies, according to Bloomberg Economics.

The U.S. economic calendar is light, with the focus being December existing home sales and University of Michigan consumer sentiment data. The reports are due for release on Friday, along with the S&P Global Manufacturing and Services Sector Surveys. Fed policymakers are in a period of silence ahead of their Jan. 28-29 meeting.

Meanwhile, Canadian Prime Minister Justin Trudeau will hold a meeting with cabinet members at a retreat in Quebec in the first two days of Trump's presidency as he prepares to deliver on hefty levies on Canadian goods Respond quickly to threats of tariffs.

Against a backdrop of uncertainty, the race to become Canada's next prime minister has begun, with former central bank governor Mark Carney and former finance minister Chrystia Freeland entering the Liberal leadership race. The Bank of Canada's fourth-quarter survey and December inflation data will also be released.

Asia

Ahead of the Bank of Japan's rate decision on Friday, Japan will release inflation data, which could rise, further supporting the case for a rate hike.

The Monetary Authority of Singapore held its first meeting of the year on the same day, and some economists saw the risk of easing measures.

Earlier on Wednesday, Bank Negara Malaysia was likely to extend a long-term policy pause and keep the benchmark interest rate at 3% (unchanged since May 2023) as price pressures remain manageable.

New Zealand released its most important inflation report for the December quarter earlier in the day, which will provide the basis for its central bank's decision-making at its first meeting in February this year.

Also on Wednesday, investors will get a look at the mood of households in South Korea, where consumer confidence has plummeted amid political turmoil over the brief imposition of martial law last month that led to President Yoon Seok-yeol's impeachment.

Estimates of gross domestic product (GDP) data on Thursday are likely to show a slight pickup in South Korea's economy in the final three months of 2024.

This week will also see trade data from the Philippines, Malaysia and Japan, while India and Australia will publish purchasing managers' indexes. Taiwan will release its GDP forecast on Friday.

Europe, Middle East, Africa

The Davos conference will be in the spotlight as global leaders and financial officials mingle with business executives at the Swiss mountain resort.

ECB President Christine Lagarde and other Governing Council colleagues will also attend, as well as Swiss National Bank President Martin Schlegel.

Embattled Chancellor of the Exchequer Rachel Reeves is another scheduled attendee. Her comments will be closely watched as markets focus on the country's fiscal challenges.

Back in the UK, wages data will be closely watched given ongoing concerns about inflation. Economists generally expect wage pressures to rise, although the Bank of England is still expected to continue cutting interest rates next month.

In the UK and euro zone, Friday's Purchasing Managers Index (PMI) data will be key, sending the first signal about manufacturing and services at the start of the year before Trump reveals how far he wants to Fulfill tariff threats.

Beyond Europe, data from South Africa on Wednesday are likely to show inflation accelerated to 3.2% in December due to higher petrol prices and a weaker rand. Forward rate agreements used to speculate on borrowing costs are now pricing in just a 25 basis point rate cut in 2025, most likely on January 30.

The region plans to make three monetary decisions:

Angola's central bank is likely to keep interest rates unchanged at 19.5% for the fourth consecutive meeting on Tuesday to curb Africa's highest inflation rate of 27.5%.
On Thursday, Norwegian officials were widely expected to keep borrowing costs at a 16-year high. They are likely to reiterate that the first post-pandemic interest rate cut could come in March from the current level of 4.5%, adding that there is also uncertainty about further easing. Most economists expect a total decline of four-quarter percentage points this year.
Türkiye's central bank warned that a 250 basis point interest rate cut in December does not necessarily mean that the easing cycle has begun. But many economists and traders believe a change has occurred and expect another move of the same magnitude on Thursday, which would lift the benchmark interest rate to 45%.
On the same day, Ukrainian policymakers are expected to raise benchmark interest rates to 14% for a second straight month as they seek to tame accelerating inflation and the country faces uncertainty over continued U.S. support as it fights off a Russian invasion.

Latin America

The region's two largest economies have released mid-month inflation data, and both are likely to see lower rates - but that's where the similarities end.

Analysts believe Brazil's economic slowdown in January was a one-off, followed by a sharp increase in February. Economists surveyed by the central bank expect monthly inflation to be close to zero in January before jumping to above 1.3% in February.

Mexico is experiencing a bumpy but clear bout of deflation due to tight monetary policy and slowing economic growth, which analysts polled by Citi predict will slow to within the bank's target range of 2% to 4%. Full-month and mid-month data tend to be very close for each economy.

As usual, Brazil Observers will receive a new survey of central bank economists, which will be joined by the Chilean Central Bank's Traders Survey and Citigroup's Mexico Economist Survey.

Argentina releases December trade data as well as consumer confidence and monthly wage data. Colombia reports November import and trade balance.

Mexico, Argentina and Colombia will publish economic activity data for Latin America's six largest economies due to end in November.

Brazil's economy is likely to lead with growth of more than 3% by the end of the year, but will give way to Argentina by 2025, with some analysts predicting growth of as much as 5%.

--With assistance from Laura Dhillon Kane, Monique Vanek, Piotr Skolimowski, Robert Jameson, Swati Pandey, Ott Ummelas and Vince Golle.