The likelihood of a rate hike by the Bank of Japan (BoJ) in December has surpassed 50%, according to overnight index swap (OIS) market data. This shift follows the release of consumer price index (CPI) data indicating a core annual inflation rate of 2.8% in Tokyo, which exceeded market expectations. The report from Derek Halpenny, a foreign exchange analyst at MUFG, highlights that this data reinforces the growing probability of a policy adjustment by the central bank.
Key economic indicators are supporting this trend, with Japan’s industrial output rising by 1.4% month-on-month in October, following a significant 2.6% increase in September. Analysts had anticipated a decline of 0.6% for October, making this the largest two-month gain since July 2022. The positive output figures, combined with the inflation data, enhance the BoJ’s confidence in the economic outlook.
Government’s Fiscal Measures and Market Reactions
In a bid to stimulate the economy further, the Japanese government has announced plans for JPY 21.3 trillion in supplementary budget spending, with JPY 18.3 trillion of this amount designated for additional debt issuance. The increased issuance will focus on short-term instruments, including treasury bills and 2-year and 5-year Japanese Government Bonds (JGBs). This strategy aims to support the long-end of the yield curve while the issuance plan is expected to exert upward pressure on front-end yields.
Despite these developments, market reactions have been muted. The Japanese Yen remains under pressure, with trading volumes affected by a temporary suspension of trading on the CME due to a data center issue. The limited foreign exchange reaction may also be attributed to the timing, as month-end trading often introduces unpredictable flows.
The combination of rising inflation expectations and improved economic indicators positions the Yen for a potential rebound. Nonetheless, current market dynamics suggest that the immediate impact on foreign exchange rates may remain subdued.
Outlook for the Yen and Future Rate Hikes
As the December meeting approaches, the consensus is that the BoJ’s rate hike probability will continue to evolve based on incoming economic data. The current situation, characterized by both rising inflation and industrial output, signals a pivotal moment for the central bank. Should the data trends maintain their momentum, the BoJ may indeed take decisive action in December, potentially altering Japan’s monetary landscape.
The outlook for the Yen, influenced by these developments, remains cautious. Traders and investors will be closely monitoring further economic indicators and government announcements, as they could significantly impact the currency’s trajectory in the months ahead.
