On Thursday, the Bank of Japan (BOJ) maintained its key interest rate unchanged and decided against demands for a rate increase following Trump’s tariff fear. The Yen, consequently, tanked against the U.S. dollar and the Australian dollar, and it saw slow growth just before the parliament’s return to Tokyo for a pivotal session next week.
According to The Japan Times, the BOJ’s decision came after a two-day policy meeting. In the meeting, analysts were split over whether rates should be raised to 0.5 percent or held at the current 0.25 percent.
Markets had already begun to anticipate the BOJ’s decision, moving on to a pause. The cautious measure came after two 2024 rate hikes ended a years-long spell of negative interest rates. Markets are waiting for BOJ Governor Kazuo Ueda’s updates about the bank’s next moves when he addresses the decision later.
Tokyo holds rate hike asTrump tariffs continue to raise significant questions
Japan's central bank kept its monetary policy settings steady, signaling it sees little urgency to raise interest rates for now https://t.co/qE5HspeK3u
— Bloomberg Economics (@economics) December 19, 2024
The BOJ’s statement of its decision to hold an interest hike revealed that it was a split 8-1 decision, with only board member Naoki Tamura voting for a 25 bps hike. The decision surprised economists in a Reuters poll who advocated for a 25 basis point hike like Tamura. Credit Agricole Securities Asia’s analysts concluded that the decision to leave rates unchanged was due to the government’s opposing pressure for a third rate hike this year. Japanese officials were concerned that the real growth in 2024 would be negative.
The uncertainty was exacerbated by Trump’s threat of further tariffs on Chinese, Canadian, and Mexican goods. The trade strategy – promoted as a tool for preventing illegal immigration and drug trafficking – raised questions regarding the encouragement of the beginning of a more general attack on the global trading system.
Japan, one of the top FDI (foreign direct investors) in the U.S., also feared the possibility of being hit by Trump’s trade tariffs, especially in the automotive industry. The U.S.-Japan tie will, however, depend on Prime Minister Shigeru Ishiba’s ability to develop a strong relationship with the incoming administration. Trump mentioned on Monday that he would ‘love to see Japan’s Prime Minister, signaling an openness to meet Ishiba. He, however, added that it was Tokyo’s decision whether the meeting happened before or after his January inauguration. The country’s officials said plans were underway for a Trump-Ishiba meeting in the shortest time possible.
Trump unveiled sweeping and ambitious economic policy changes that prompted concern and optimism among domestic and foreign markets. His proposals included implementing new steep tariffs, which economists said could have dire consequences. Michael Gapen, the chief U.S. economist at Morgan Stanley, pointed out the uncertain outlook due to the potential policy changes, highlighting the apprehension surrounding Trump’s economic agenda. His analysis painted a scenario where severe fallout could occur if the policies were implemented as planned.
“The information the Bank of Japan wanted most today was what the Fed thought about rate cuts next year. The Fed gave the impression that they weren’t in a hurry. There is a FOMC meeting in January, and with an assumption that the Fed would keep current rates steady next month, if the market becomes stronger for the dollar and weaker for the yen, the BOJ will have a better chance to raise interest rates.”
–Mari Iwashita, Executive Economist, Daiwa Securities, Tokyo
Takumi Tsunoda, Senior Economist at Tokyo’s Shinkin Central Bank Research Institute, agreed, ‘The BOJ should be able to raise rates easily at the January meeting.’ Charu Chanana, the Chief Investment Strategist at Singapore’s ‘SAXO, doubted that ‘Ueda can clearly signal a January rate hike given the uncertainties around the Fed and Trump presidency’ at his public address on the BOJ’s plans later today.
The Yen loses against major world currencies following the BOJ’s decision
The USD/JPY and the ADU/JPY currency pairs declined due to concerns about the BOJ’s decision to maintain its current interest rate. NBC Connecticut reported that the Yen weakened against the U.S. dollar after the BOJ’s rate decision. On December 19, it went down past the key level of 156 against the U.S. dollar. Japan’s currency slid as much as 0.4% to November levels of 155.44 before hitting a one-month low, trading at 155.42. Japan’s Nikkei 225 dropped 0.85%.
Analysts in a Bloomberg survey said they were closely watching the 155 level, seeing it as a potential trigger for a verbal intervention from Japanese authorities. Christopher Wong, a currency strategist at OCBC, observed that the Fed’s pause and the BOJ’s reluctance suggested further upward pressure for the dollar/yen. Ms Charu Chanana, the chief investment strategist at Saxo Markets, said the ‘Fed’s hawkish tilt and BOJ’s pause could give Yen traders fresh reasons to ‘carry’ on.’
The JPY also started losing ground against the AUD for the second consecutive session when it traded at 97 during the European hours on Wednesday in anticipation of the BOJ’s Thursday decision. The AUD/JPY extended its losses amid increasing pressure on the AUD of an interest rate cut by the Reserve Bank of Australia (RBA). On Wednesday, the NAB (National Australia Bank) maintained its prediction of the first RBA rate cut during the May 2025 meeting. However, they agreed that a February rate cut was also possible.
Japan’s Ministry of Finance unexpectedly announced the country’s trade deficit improvement on December 18 despite the falling Yen. November’s trade deficit had narrowed to ¥117.6 billion, an improvement from October’s ¥462.1 billion. The improvement was mainly attributed to a 3.8% YoY export growth in November. However, the country’s trade data pointed to weakening domestic demand amid Japan’s uncertain economic outlook and concerns about Trump’s tariffs, which possibly contributed to the BOJ’s decision.
The Yen also traded down 0.4% at 114.03, weakening against the Singapore dollar.
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