December 13, 2024 — Japan’s business sentiment has shown a notable improvement, setting the stage for potential changes in the country’s monetary policy. The latest quarterly Tankan survey, released Friday, revealed a rise to +14, the highest reading since early 2022. This upbeat sentiment comes just ahead of the Bank of Japan’s (BOJ) upcoming policy meeting, sparking speculation that the central bank may soon take further steps toward tightening monetary policy.
The Tankan survey, a key indicator of corporate sentiment in Japan, indicates that businesses are feeling more optimistic as the country heads into the holiday season. This improvement in sentiment could play a pivotal role in shaping the BOJ’s decision-making process. With the current benchmark interest rate at a low 0.25%, the Bank of Japan has been signaling a gradual move toward higher rates in the future, aligned with the country’s economic recovery.
However, sources close to Reuters suggest that the BOJ may not implement another rate hike as soon as next week. Policymakers are reportedly cautious and seeking more conclusive evidence on wage growth before taking any further action. While half of economists predict a rate hike in December, the market currently places the probability of a rate increase at less than 30%.
Another factor complicating the BOJ’s decision-making is the uncertain international landscape, particularly the economic policies of the U.S. under a potential second term of President Donald Trump. Economists are concerned about the impact of Trump’s promised trade tariffs, especially on Japan’s major automakers, which could face heightened risks in the event of a renewed “tit-for-tat” trade war.
In addition, the BOJ will be closely monitoring developments in the U.S. Federal Reserve’s monetary policy. The Fed is widely expected to cut interest rates next week, but if it surprises markets by holding rates steady, the U.S. dollar could surge, putting additional pressure on the Japanese yen. Such a move could force the BOJ to raise rates to prevent further depreciation of the yen, which has been weakening for some time.
As Japan’s economy continues to show signs of strength, particularly in the corporate sector, the BOJ faces a delicate balancing act in managing its policy to support growth while ensuring financial stability. Investors and economists alike will be watching closely for any signs of change in the BOJ’s approach in the coming weeks.
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