Bank of Japan is poised to raise rates to a 30-year high despite economic weakness

Economic

Summary:

The BOJ is expected to hike rates to 0.75%, highest in 30 years, despite weak growth. Attention shifts to guidance on the neutral rate, future hikes, and yen implications amid fiscal risks.

Japan’s central bank on Thursday kicked off its last policy meeting of the year, with expectations that it will raise benchmark interest rates to their highest in 30 years, as it seeks to move ahead with policy normalization set forth last year.

The decision, due Friday, could see rates raised to 0.75% — highest since 1995 — with data from LSEG showing an 86.4% probability of a hike by the Bank of Japan.

A rate hike will likely strengthen the yen against the dollar, and contain inflation, which has run above the BOJ’s target for 43 straight months. But it could further slow a weak Japanese economy that contracted in the third quarter.

Revised GDP numbers showed that Japan’s economy in the three months through September contracted more than initially estimated, shrinking 0.6% quarter on quarter, and 2.3% on an annualized basis.

With a rate hike almost certain, experts said that market focus will be more on the BOJ’s commentary after the decision.

Gregor MA Hirt, global multi-asset chief investment officer at Allianz Global Investors, said in a Tuesday note that the market reaction will depend on the nuances of the BOJ’s communication.

Signals around the neutral, or terminal, rate — one that balances inflation and economic growth — and comments on yen weakness will be some of the things to look out for.

Governor Kazuo Ueda reportedly said earlier this month that it was difficult to estimate the terminal rate, with the central bank pegging it at 1% to 2.5%.

“Unfortunately, the neutral rate of interest is a concept for which we can only produce an estimate with quite a wide range,” Ueda told Japan’s parliament.

While efforts have been made to narrow the rate range, Ueda said that the BOJ must guide monetary policy without clarity on where exactly the neutral rate lies.

Carl Ang, fixed income research analyst at MFS Investment Management, said that an updated estimate on the neutral rate may be shared after the Friday meeting.

Pace of rate hikes

Japan embarked on policy normalization last year, abandoning the world’s only negative interest rate regime that had been in place since 2016. Since then, the BOJ has been consistently maintained it’s stance of gradually raising rates.

Investors will be looking out for the BOJ’s commentary around the pace of future rate hikes.

Dutch bank ING said in a note on Wednesday that while the market largely expects another hike in June 2026, it is more likely that the BOJ will next raise rates only in October.

In contrast, Bank of America estimates a hike in June, while not entirely discounting the BOJ fast-forwarding it to April if the yen weakens rapidly. BofA analysts expect the BOJ to bring the terminal rate to 1.5% by end 2027.

While MFS’ Ang said there were some risks to Japan’s policy normalization path, including a U.S. economic slowdown and escalating China-Japan tensions, it would take a “material shock” to veer the BOJ away from its rate trajectory.

Bonds and forex outlook

The central bank has not directly addressed foreign exchange concerns, but should Ueda comment on the yen’s weakness directly, it would be seen as a “line in the sand,” Allianz’s Hirt said.

The yen has been trading around the 154-157 against the dollar since November, having weakened over 2.5% since Prime Minister Sanae Takaichi, a proponent of looser monetary policy, took office in October.

Takaichi during her leadership contest had staunchly opposed rate hikes by the BOJ, but has since softened her stance.

A higher rate will also push up bond yields and borrowing costs for the Japanese government, which has unleashed its largest stimulus package since the Covid-19 pandemic as it tries to boost the economy.

Nikkei earlier this month reported that Japan’s borrowing costs could double, if benchmark yields rise to 2.5% from its current level of about 2%. Yields on 10-year Japanese government bonds are hovering near 18-year highs, last at 1.971%.

Yields at 2.5% would mean interest payments for the Japanese government will jump to 16.1 trillion yen in its 2028 fiscal year compared to 7.9 trillion yen in fiscal 2024.

Accounting for fiscal concerns and possible finance ministry intervention in forex markets, something that finance minister Satsuki Katayama has not ruled out, MFS’ Ang expects the yen to stay between 150 and 160 next year.

Source: cnbc

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Justin

Stocks

Stocks rallied at the open, bouncing after a sharp selloff Wednesday, as a cooler-than-expected inflation report lifted hopes that the Federal Reserve would cut interest rates further. An optimistic outlook in the tech sector also lifted sentiment.

The S&P 500 Index opened 1% higher Thursday morning and looks to snap a four-day losing streak. Micron Technology Inc. was the top-performing stock in the benchmark after providing an upbeat forecast, citing the ability to charge more for products given rising demand and supply shortages.

The tech-heavy Nasdaq 100 Index advanced 1.3%, rebounding after its biggest daily drop in a month, while the blue chip Dow Jones Industrial Average rose 0.5%.

"The earnings engine in the United States is on," Emily Roland, co-chief investment strategist at Manulife John Hancock Investments, in a Bloomberg TV interview. She's looking for earnings growth outside of the tech for 2026, after being overweight the sector for much of 2025.

"We still like tech, but there's no doubt about it, it's expensive," she added.

The lofty valuations of AI stocks continue to concern investors. About 57% of participants in a Deutsche Bank survey said a potential plunge in AI valuations is the biggest risk to market stability in 2026. Separately, JPMorgan Chase & Co. warned of "extreme crowding" in speculative stocks, including a handful of AI-linked names.

Thursday's market move follows a cooler-than-expected inflation report. The core consumer price index rose 2.6% in November, according to the Bureau of Labor Statistics — well below expectations for a 3.1% gain. Traders also focused on jobless claims data, which showed continuing claims rising to 1.9 million.

"The Fed could look at the increase in the unemployment rate and the tame inflation reading as a reason to cut again," said Brian Jacobsen, chief economic strategist at Annex Wealth Management.

US President Donald Trump said in a televised address Wednesday night that he would soon pick a new Fed chair that would bring rates down significantly further as he sought to calm concerns about the high cost of living.

"A Santa Rally could still be in the cards," said David Russell, global head of market strategy at TradeStation,

Still ahead, FedEx Corp. and Nike Inc. are set to report earnings after the closing bell Thursday. Traders will also parse existing home sales data and a University of Michigan survey of inflation expectations, which are expected Friday morning, for additional clues on the central bank's rate path.

Source: Bloomberg Europe

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Samantha Luan

Political

Economic

The US government acknowledged in a federal court filing that it was liable for damages resulting from a deadly collision between an Army helicopter and a regional American Airlines Group Inc. jetliner earlier this year near Washington, one of the deadliest crashes in decades.

"The United States admits that it owed a duty of care to plaintiffs, which it breached, thereby proximately causing the tragic accident" on Jan. 29 that killed 67 people, Justice Department lawyers wrote in a court document Wednesday in one of about two dozen lawsuits filed over the crash.

The American CRJ-700 jet and the Sikorsky UH-60 Black Hawk helicopter collided as the plane approached Ronald Reagan Washington National Airport in Virginia, with both aircraft falling into the Potomac River. The jet was carrying 60 passengers and four crew members on Flight 5342 from Wichita, Kansas. The helicopter was carrying three people participating in a regular training mission. Family members of the victims have sued the government and American, along with one of its subsidiaries, PSA Airlines.

CNN reported earlier on the Justice Department filing.

Robert Clifford, an attorney representing the wife one of the passengers killed in the crash, said in a statement that the US Army had admitted its "responsibility for the needless loss of life," as well as the Federal Aviation Administration's "failure to follow air traffic control procedure." However, the government was just "one of several causes," Clifford said, pointing out that American and PSA have sought to dismiss the complaints.

American declined to comment on the recent filing but referred Bloomberg to its previous motion to dismiss the case against it. In that motion, the airline said it's "sympathetic to plaintiffs' desire to obtain redress for this tragedy" but "plaintiffs' proper legal recourse is not against American. It is against the United States government."

The FAA referred questions to the Justice Department. The US Army didn't immediately respond to messages seeking comment after normal business hours.

The collision was followed by several other aviation mishaps, including crashes and near misses, that resulted in widespread concern among the flying public. Since then, the Federal Aviation Administration has stepped up safety measures at the busy Reagan airport and restricted non-essential helicopter operations.

The case is Crafton vs. American Airlines, 25-cv-03382, US District Court, District of Columbia (Washington).

Source: Bloomberg Europe

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Adam

Economic

Inflation data set for release Thursday morning is expected to show price increases remain above the Federal Reserve's target in the final major piece of US economic data released on an altered schedule due to the government shutdown.

The November Consumer Price Index (CPI) report is set for release at 8:30 a.m. ET on Thursday and is expected to show headline prices rose 3.1% over the prior year, according to data from Bloomberg.

"Core CPI," which strips out the often-volatile food and energy categories, is expected to rise 3.1% from last year.

In September, the last month for which there is inflation data, both the headline and core CPI measures rose 3% from a year ago.

Thursday's report will mark the first official inflation read since September, after the BLS opted to cancel the October report in light of the US government shutdown. This means November's reading will not have month-on-month comparisons for the headline and core CPI figures.

This should also mark the final time major economic data, notably the monthly jobs report and inflation data, is published on an altered schedule following the government shutdown that lasted 43 days earlier this year.

The November jobs report was released on Tuesday, showing more jobs were created last month than expected, while the unemployment rate hit a four-year high. The December jobs report is set for release on Jan. 9, 2026, returning to its typical spot on a Friday morning.

"Inflation is still above target ... but this should be temporary," said Jeffrey Roach, chief economist for LPL Financial. "As demand cools in the coming months, pricing pressures should ease, giving investors some breathing room."

Economists at Bank of America wrote in a report ahead of the release that goods inflation should "remain sticky owing to tariffs," while services "should be softer driven in part by health insurance."

This push-pull dynamic within the inflation data is likely to keep the Fed on the sidelines at the end of its January meeting, with traders currently pricing in a roughly 25% chance the central bank cuts rates next month.

Last week, the Fed's forecasts suggested it would cut rates only one more time in 2026 after cutting rates by 0.25% at three straight meetings to end 2025.

Source: finance.yahoo

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Gerik

Economic

Treasury Market Cools Ahead of CPI Release

U.S. government bond yields inched downward early Thursday, reflecting investor caution ahead of a closely watched inflation report. At 4:59 a.m. ET, the 10-year Treasury yield declined by 1 basis point to 4.135%, while the 2-year fell by 2 basis points to 3.464%. The 30-year bond saw a minimal dip, settling at 4.818%.

These modest declines reflect the market’s defensive posture, as investors position themselves ahead of inflation data that could significantly influence Federal Reserve policy expectations for 2026. Given that bond yields move inversely to prices, the slight drop suggests cautious demand for safe-haven assets in anticipation of a pivotal macroeconomic release.

Focus Turns to Annual CPI Amid Data Gaps

The Bureau of Labor Statistics is scheduled to release the Consumer Price Index report at 8:30 a.m. ET. This CPI print is especially important as it is the first since the conclusion of the 43-day U.S. government shutdown. Due to data disruptions, the release will not include the usual month-over-month inflation figures. Instead, focus will shift entirely to annual trends.

Economists surveyed by Dow Jones project headline CPI to come in at 3.1% on a year-over-year basis, while the core CPI which excludes food and energy is expected at 3.0%. These figures are significant because they straddle the psychological divide between the high-2% and low-3% range, a threshold that influences monetary policy direction.

Implications for Federal Reserve Strategy

If inflation data surprises to the downside and remains within the high-2% range, it could reinforce expectations for interest rate cuts next year. José Torres, senior economist at Interactive Brokers, emphasized that keeping inflation “in the twos” would strengthen the case for monetary easing in 2026. By contrast, any upward deviation may force the Fed to maintain a more hawkish stance, delaying cuts and keeping borrowing costs elevated.

The anticipated inflation figures will serve as the final price benchmark of the year, effectively setting the tone for early 2026 policymaking. Given the Fed’s dual mandate of managing inflation and maximizing employment, any signal of persistent pricing pressure could complicate its path forward, especially with signs of labor market resilience.

Labor and Housing Data Also in Play

Beyond inflation, investors are also monitoring jobless claims and the state of the housing market. The Labor Department will release its weekly jobless claims data today, offering real-time insight into the labor market’s momentum. Additionally, existing home sales data for November is expected Friday, shedding light on consumer sentiment and credit conditions following a volatile year in real estate.

These indicators, when viewed alongside inflation, will form a broader picture of economic health, which in turn will guide rate path expectations. Lower-than-expected jobless claims could temper enthusiasm for rate cuts, while weak home sales could amplify arguments for easing.

Inflation Print Could Unlock Market Momentum

Thursday’s muted bond yield movements illustrate the market’s suspense. While the CPI data alone may not trigger an immediate rate shift, its interpretation will be crucial for shaping forward guidance. A reading below 3% could trigger a rally in both bonds and equities, as it would validate dovish sentiment and increase confidence in Fed rate reductions next year.

However, any deviation from these expectations could revive uncertainty, prolonging elevated yields and keeping downward pressure on rate-sensitive sectors. As such, the forthcoming inflation data despite lacking monthly granularity is likely to influence asset pricing well into the start of 2026.

Source: CNBC

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Adam

Commodity

The long-standing gap between supply and demand for silver became clear in the second half of the year, especially in the current quarter. The price of the metal has stayed confidently above $60 an ounce and looks set to reach the next key level later this year.

A major factor pushing buyers is the possibility of another interest rate cut by the Fed due to a weakening labor market. Falling yields on US bonds and a relatively weaker US dollar are also creating conditions that could keep silver prices moving higher.

Today, we will see new data on CPI, which suggests that year-on-year inflation may tick slightly above the 3% mark.

Will the Fed Keep Rates Steady Next Year?

Looking at the latest inflation data, which shows a steady rebound, one might question the case for interest rate cuts. However, the Federal Reserve has a dual mandate: it focuses not only on price stability but also on the health of the labor market. Recent data, including revisions to previous figures, make it clear that labor conditions are worsening, as reflected by the highest unemployment rate in several years.

Silver: Key Support Looks Intact Ahead of CPI — What Traders Are Watching Next_1

The current forecast is for two more 25-basis-point rate cuts next year, which may be seen as a minimum given the ongoing weakness in economic data. The market currently assigns less than a 73% probability to no change at the first Fed meeting next year.

Today, new CPI data will be released. With the market consensus at 3.1% year-on-year, the actual figure will indicate whether the recent rebound in price growth continues.

Silver: Key Support Looks Intact Ahead of CPI — What Traders Are Watching Next_2

Are 2-Year Bonds on the Verge of a Support Break?

Since September, US 2-year government bond yields have mostly moved within a consolidation range. However, the lower boundary, a key long-term support around 3.45%, is facing consistent downward pressure.

Silver: Key Support Looks Intact Ahead of CPI — What Traders Are Watching Next_3

If the anticipated breakout happens, the next technical targets drop below $3. If the breakout fails, a move above the main downward trend line could drive yields toward the 4.10 resistance level.

Is the Silver Pullback a Buying Opportunity?

Strong demand is preventing the market from retreating to more favorable prices, so any pullbacks are mostly sideways consolidations. If this momentum carries gold toward $70 an ounce, traders may look at the trend line and local support near $65 as potential entry points for long positions.

Silver: Key Support Looks Intact Ahead of CPI — What Traders Are Watching Next_4

A decline below current levels could set the stage for a wider rebound, with the next target near $60 an ounce.

Investing: source

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Warren Takunda

Economic

President Donald Trump’s glowing account of progress under his watch Wednesday was out of tune with the experience of price-squeezed Americans and the story told by some of his government’s own statistics.

In a speech from the White House, Trump assailed the record of his Democratic predecessor and boasted expansively about his record so far. Not all of those boasts were credible.

Among them:

On inflation

TRUMP: He blamed Democrats for handing him an “inflation disaster,” “the worst in the history of our country,” and said that now, the prices of turkey and eggs have come down and “everything else is falling rapidly. And it’s not done yet. But boy, are we making progress.”

THE FACTS: His claim that prices are falling rapidly is not seen in the inflation numbers, which are about where they were when he took office, after having fallen significantly before the end of Joe Biden’s presidency. Nor is it true that the Biden era gave the country its worst inflation ever.

The consumer price index was 3% in September, the same rate as in January, a tick up from 2.9% in December, Biden’s last full month in office. In an AP-NORC poll this month, the vast majority of U.S. adults said they’ve noticed higher than usual prices for groceries, electricity and holiday gifts in recent months.

Biden-era inflation peaked at 9.1% in June 2022, a consequence of supply chain interruptions, potentially excessive amounts of government aid and Russia’s invasion of Ukraine driving up food and energy costs. Americans have known even worse and more sustained inflation than that: higher than 13% in 1980 during an extended period of price pain. By some estimates, inflation approached 20% during World War I.

Inflation had been falling during the first few months of Trump’s presidency, but it picked back up after the president announced his tariffs in April.

On investment

TRUMP: “I secured a record-breaking $18 trillion of investment into the United States.”

THE FACTS: Trump has presented no evidence that he’s secured this much domestic or foreign investment for the United States. Based on statements from various companies, foreign countries and the White House’s own website, that figure appears to be exaggerated, highly speculative and far higher than the actual sum.

Even the White House website offers a far lower number, $9.6 trillion, and that figure appears to include some investment commitments made during Biden’s presidency.

Trump has routinely claimed rosy investment numbers, without offering the details to support them. Trump nailed down some of the investment terms in an October trip to Japan and South Korea, but they’re over multiple years and it remains to be seen how ironclad those commitments and others will be.

A landslide?

TRUMP: “I was elected in a landslide, winning the popular vote and all seven swing states and everything else, with a mandate to take on a sick and corrupt system.”

THE FACTS: Trump won a decisive victory but hardly a landslide one, however you define a landslide. Trump, who became president with 312 electoral votes, won fewer than Democrats Barack Obama in 2008 (365) and 2012 (332) and Bill Clinton in 1992 (370) and 1996 (379).

The electoral performance of those men pales in comparison with the sweeps by Franklin Roosevelt in 1936 (523), Lyndon Johnson in 1964 (486), Richard Nixon in 1972 (520) and Ronald Reagan (525) in 1984.

Trump did win more popular votes than his Democratic opponent, Kamala Harris, but not quite a majority of them. His win in 2024 ranks among the more narrow.