Japan’s BoJ postponed a rate hike to analyse more data

The Bank of Japan kept its policy rate at 0.25% at Thursday’s meeting, as we expected. We believe that the central bank will raise the policy rate to 0.5% in January 2025 and to 0.75% after confirming the strong outcome of the Spring Wage Negotiation next year, most likely in July.

What you will learn:

• The BoJ is waiting for more data to confirm the momentum of the wage-driven inflation dynamics. Although scheduled earnings have increased at a rate roughly consistent with 2% inflation, data on consumption has been mixed amid lacklustre real income growth.
• We project another strong wage increase of around 4.5% in 2025, slightly less than 5.1% this year. Risks are tilted to upside. SMEs will generally manage to follow the wage increases by leading large firms, but more unprofitable firms will start to fall behind the overall wage growth trend.
• We project that rising wages will gradually raise CPI inflation after it slows to around 1.5% by mid-2025 due to the base effect of past inflation. We are more cautious than the BoJ on how much firms, especially SMEs, will manage to pass on rising wage costs to final prices.