A lot of anticipation is riding on the BOJ this week with the Japanese central bank set to deliver one of, if not the last major key risk event for the year. A rate hike is well anticipated at this point as the BOJ looks to have won the battle in the first round against Japan prime minister Takaichi.
That being said, she hasn't backed down from her stance in wanting the BOJ to play ball to fit with her more proactive fiscal policy. Earlier today, she also came out to say that now isn't the time for fiscal tightening for Japan. So, you can see that she is definitely standing her ground and will want the BOJ to follow suit next year.
But for the last meeting to round off the 2025 year, it looks like Ueda & co. have definitely grown a pair and will deliver another rate hike in bringing the short-term policy rate to 0.75%.
As concerns grow on Takaichi's fiscal policy stance, Japanese bonds have been sold off heavily in the past few months. And adding to the BOJ's more hawkish stance in recent weeks, that's a double whammy resulting in a surge higher in yields. And looking this week, we're seeing 10-year JGB yields jump up to their highest since June 2009.
And the selloff in the bond market is also exacerbating the declines in the Japanese yen currency. It's a tough situation for those holding Japanese assets.
The government and BOJ will have to find ways to not prevent over-speculation on the part of market players. However, it doesn't seem like the line is being drawn on either front just yet.
USD/JPY is trading back above 155.00 today after a daily break under that overnight. And if the BOJ is adamant to want to keep doing battle with the government next year, it's going to be tough for Japan to find much stability in both the currency and bond markets.
I wouldn't expect the BOJ communique this week to be explicit about that of course. However, the message a rate hike in itself sends is a rather strong one. That especially if the spring wage negotiations in March also delivers a more upbeat result in increasing the pressure for the BOJ to move again.
