This week, it is predicted that the Bank of Japan will maintain its rates.

• According to a poll by CNBC, 13 out of 24 economists expect the Bank of Japan to maintain its current policy after its two-day meeting concludes on Thursday.
• The same majority predicts the central bank will raise rates in January.
• By the end of 2025, the yen is predicted to weaken against the U.S. dollar from its current value of around 154 to 147.4.

This week, the Bank of Japan (BOJ) is predicted to maintain its benchmark interest rate without any changes, as it waits for more clarity on domestic wage and spending trends, as well as policy adjustments from the new administration of U.S. President-elect Donald Trump, according to a poll of economists conducted by CNBC.

54% of 24 economists surveyed between Dec. 9-13 expect BOJ to keep its benchmark interest rate unchanged at 0.25% at the end of its two-day meeting on Thursday, while the same number anticipate a rate increase in January.

The BOJ, which raised rates in July, has indicated that it may tighten further if wage growth and prices align with its projections. BOJ Governor Kazuo Ueda stated in a recent media interview that another rate hike is "nearing" as economic data are on track, but he also mentioned risks, such as wage trends next year and potential changes in U.S. economic policy.

Japanese interest rates are the lowest among developed countries because of the BOJ's longstanding policy of supporting the country's struggling economy. This policy has kept the yen weak against most major currencies, boosting exports and tourism and driving the "carry trade" when investors borrow yen to invest in higher-yielding assets. However, these trends could change as Japanese interest rates rise while central banks in other countries lower their rates.

According to CNBC, many economists believe that Japan's economy is likely to achieve the central bank's 2% inflation target due to wage growth. However, they suggest that the BOJ may delay its evaluation of wage-driven inflation dynamics and focus on the momentum from next year's spring wage negotiations and Trump's trade and tariff policies.

According to Akira Otani of Goldman Sachs Japan, the BOJ has not yet gained confidence in its outlook due to a lack of clarity on whether small and medium-sized enterprises can sustain wage increases, a risk flagged by the BOJ as crucial to achieving its inflation target. Japanese unions typically negotiate wage increases in the first three months of the calendar year ahead of the financial year that begins in April.

Recent media reports indicated that policymakers at the central bank may want more time to monitor overseas risks and gather more information on Japan's wage outlook, which has led to the belief that they will likely hold rates this week.

Shigeto Nagai, head of Japan Economics at Oxford Economics, stated in a note last week that the BOJ's unclear communications suggest a possible outcome of leaving rates unchanged until more information is obtained from spring wage negotiations and U.S. policy developments.

Japanese wages have been increasing annually by 2.5% to 3%, but inflation has remained above the BOJ's 2% target for 30 consecutive months. Despite the desire to normalize monetary policy, authorities are cautious about raising rates too quickly after 22 years of deflation. Japanese households have seen a decline in spending for three consecutive months as of October, while factory output has been unstable.

Tokyo Global Markets Research head Teppei Ino pointed out the impact of media reports on market expectations. Overnight swap markets have decreased bets on a December rate hike, with a 77% probability of no change as of Monday morning, significantly higher than the 35% likelihood of standing pat priced in at the end of November.

According to CNBC's report on Friday, Ino stated that based on the available media reports, the chances of a rate hike being postponed have risen.

In light of the current trend of yen depreciation and the upcoming FOMC meeting before the BOJ meeting, it is important to remember that there is a possibility of an abrupt decision to raise rates if the USD/JPY reaches levels like 155, as Ino pointed out, referring to the Federal Open Markets Committee meeting scheduled this week.

The yen was trading around 154 to the dollar on Monday morning.

Some economists anticipate that the BOJ will tighten its policy this week.

Nomura anticipates that the BOJ will increase its policy rate by 25 basis points on Thursday, based on strong economic and price fundamentals. Nevertheless, the company acknowledges that a rate hike may be postponed due to uncertainties surrounding U.S. policy.

If the BOJ places greater emphasis on uncertainties, including U.S. policy conduct and market trends during the Christmas season, it may decide to put off any rate hike, according to research analyst Kyohei Morita in a Dec. 11 note.

The brokerage mentioned the possibility of the BOJ delaying its rate increase due to uncertainty about the government's fiscal support for households. Prime Minister Shigeru Ishiba, whose government is in negotiations with opposition parties over the size of a proposed increase to the minimum annual taxable income threshold, lacks a parliamentary majority.

Currency Risks

The Japanese yen was identified as a crucial element affecting the BOJ's decision-making by numerous analysts.

According to Kazuo Momma, executive economist at Mizuho Research, the yen is the most significant factor that could alter his perspective. He stated that the BOJ is likely to maintain its stance this week and increase the benchmark rate by 25 basis points in January. Momma added that if the yen depreciated at an accelerated rate, it would cause public and government discontent, compelling the BOJ to adopt a more aggressive approach to raising interest rates.

Jun Takazawa, Asia Economist at HSBC, emphasized risks from both directions.

"If the U.S. dollar becomes stronger due to fiscal, monetary, and trade policies, it could negatively impact the yen and speed up the Bank of Japan's normalization process. However, a weaker yen, while beneficial for Japan's reflation efforts, could lead to a delay in raising interest rates if it becomes too strong."

By the end of 2025, the yen is predicted to average 147.4 against the U.S. dollar, according to a survey of 24 analysts by CNBC. Last week, the dollar increased by 2.4% against the yen as traders reduced their expectations for a BOJ rate hike this month.