The Bank of Japan (BoJ) decided to maintain its interest rate in the latest meeting.

The Japanese yen weakened to 156 yen per dollar, marking its lowest level in four months. Meanwhile, the U.S. dollar strengthened significantly after the Federal Open Market Committee (FOMC) meeting, as the Federal Reserve hinted that it may need to delay further interest rate cuts due to a slight uptick in inflation. The Fed emphasized the need to continue managing inflation to ensure it stays within the target range. Investors now anticipate only two rate cuts by the Federal Reserve next year, down from the previously expected four cuts.

The BoJ's decision to keep rates at 0.25% marks the highest level since 2008. Naoki Tamura, a BoJ board member, advocated for a 25 basis-point hike, but the central bank stated that additional time is needed to assess various risks, particularly concerning U.S. economic policies under Donald Trump and Japan's wage trends in the coming year. Policymakers affirmed that Japan's economy continues to grow close to its medium-term potential. Consumer spending remains on an upward trajectory, supported by corporate profits and improved business expenditures. Exports and industrial production remain steady. Japan's inflation rate stands between 2.0% and 2.5% year-over-year, driven by rising service prices. Moderate increases in inflation and the core CPI are expected moving forward.

Japanese wages rose by 2.6% year-over-year in October, marking the slowest growth since May, aligning with market expectations. Real wages, adjusted for inflation, remained flat compared to October 2023, indicating stable consumer purchasing power. This stability supports expectations of a potential BoJ rate hike in the coming months, with many predicting the next hike to occur in January or February.

BoJ Governor Kazuo Ueda recently suggested that a rate hike could happen soon, given Japan's economic growth aligns with forecasts. However, BoJ board member Toyoaki Nakamura proposed a December rate hike, citing domestic economic resilience. Overtime pay, a key indicator of corporate strength, rebounded by 1.4% in October after a 0.9% decline in the previous month.

Japan's service sector PMI rose to 51.4 in December, up from 50.5 in the prior month, marking the highest level since September and indicating two consecutive months of expansion. New business growth reached a four-month high, and employment continued to expand. However, export goods slowed slightly due to weakened global demand amid trade pressures. Input costs rose sharply, though confidence in the service sector improved slightly despite ongoing concerns over labor constraints and rising costs.

The 10-year Japanese government bond yield fluctuated around 1.05% following the BoJ's decision to keep the policy rate at 0.25%. Governor Ueda, in a post-meeting press conference, stated that the decision was based on wage trends, foreign economic uncertainties, and future U.S. government policies. Investors speculate that the BoJ may delay another rate hike in January to observe further economic trends. Meanwhile, U.S. government bond yields have surged rapidly.