Today’s market comment on behalf of Dilin Wu Research Strategist at Pepperstone
24th January 2025
The Bank of Japan (BoJ) has raised interest rates by 25bp, marking its first rate hike in six months and the largest increase since February 2007, in line with market expectations.
This decision was driven by two key factors. First, Japan’s core CPI rose 3% year-on-year in December, the first time in 16 months, signaling persistent inflationary pressures. Additionally, factors such as labor shortages, restrictive immigration policies, and market expectations of a 5% wage increase in 2025 further paved the way for the rate hike. Second, the absence of immediate, aggressive trade protectionism from President Trump following his inauguration meant yen assets were not severely impacted, providing a favorable environment for tightening.
The BoJ has raised its median forecast for core CPI in the current fiscal year and the next two years, indicating a stronger conviction in the persistence of inflation than previously anticipated. The overall tone of the meeting was hawkish, with the central bank noting that real interest rates remain negative and signaling that further rate hikes may be necessary.
The hawkish rate hike initially caused a 50bp drop in USDJPY, but given that the market had almost fully priced in a 25bp hike before the meeting, the rate hike itself is unlikely to cause a significant depreciation of the yen. Instead, the BoJ’s guidance on the future path of interest rates will play a more decisive role in determining the strength of the yen.
In the upcoming press conference, Governor Ueda is expected to emphasize that the rate hike cycle is not yet complete, but may avoid committing to a specific path of future hikes in order to maintain flexibility. Traders will be closely watching Ueda’s comments on the pace of future rate hikes, the current weakness of the yen, and his views on the US economic and political outlook. If the press conference fails to deliver a sufficiently hawkish tone, the yen may end the week at a lower level.
