Bank of Japan Signals Rate Hikes

Labor Woes Drive BOJ’s Hawkish Shift

The Bank of Japan (BOJ) is increasingly attributing weak economic activity to chronic labor shortages rather than stagnant demand, a shift that could justify raising interest rates beyond initial expectations. Across industries, from factories to hotels and restaurants, businesses are struggling to operate at full capacity, not because of a lack of customers but due to a shortage of workers. This view is gaining prominence within the central bank’s commentary.

Although Japan’s output gap remains slightly negative, suggesting the economy is not operating at full potential, BOJ policymakers are challenging the traditional view that weak demand is holding back inflation. Despite sluggish consumption, the central bank is placing greater emphasis on wage-driven inflation caused by persistent labor shortages, signaling a stronger case for sustained rate hikes.

The BOJ’s January quarterly outlook report highlights growing signs that higher wages are fueling inflation, reinforcing expectations of further monetary tightening. Supporting this view, BOJ board member Naoki Tamura, known for his hawkish stance, stated on Thursday that interest rates should rise to at least 1% in the latter half of fiscal 2025.

Technical Analysis of USD/JPY Daily Chart

(USD/JPY Daily Price Chart, Source: Trading View)

The recent price has broken through the upward trendline and even breached the previous support zone with significant bearish momentum. However, there is a possibility that the price might retest the previous structure before dropping further to retest the support zone below. It’s crucial to observe how the price reacts in either of the rectangular zones.

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