A recent survey conducted by CNBC has shed light on the potential financial maneuvers by the Bank of Japan (BoJ) amidst a backdrop of changing economic conditionsThe institution, grappling with a sluggish domestic economy and external risks, appears poised to keep its benchmark interest rate untouched at 0.25% during its upcoming meetingThis decision seems primarily driven by the need to assess further trends relating to domestic wage growth and spending patterns, along with monitoring developments in U.Sgovernment policy.

Among the 24 economists who participated in the survey, a noteworthy 54%—or 13 analysts—predicted that the rate would remain steady following the conclusion of the two-day meeting scheduled for ThursdayA similar proportion of experts forecast a potential rate hike in January, signifying that many are adopting a wait-and-see approach influenced by the evolving economic landscape

The survey was conducted from December 9 to 13, highlighting a window of economic uncertainty.

The last time the BoJ opted for an increase in interest rates was back in July, and since then, hints have emerged suggesting the central bank's readiness to tighten monetary policy should wage growth and inflation align with expectationsBoJ Governor Kazuo Ueda, during a recent media encounter, conveyed that a forthcoming rate hike is on the horizon as the economic data stabilizesHowever, he also acknowledged potential risks, particularly related to wage trends in the upcoming year and shifts in U.Seconomic policies.

Japan's interest rates are among the lowest compared to its developed counterparts, a repercussion of the BoJ's longstanding commitment to supporting the nation's languishing economyThis policy has resulted in a weakened yen against most major currencies—a development that has bolstered Japan's export and tourism sectors

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Investors have also engaged in “carry trade” strategies, borrowing in yen to invest in higher-yielding assets abroadNevertheless, as Japanese rates begin to gain traction, and with other central banks considering rate cuts, these trends could possibly reverse.

Many economists have expressed to CNBC that recent economic data indicates Japan is on a promising trajectory towards achieving the BoJ’s inflation target of 2%, something primarily driven by increased wage growthYet, they caution that the central bank may opt to delay any alterations to its policy stance for an additional month, deliberately focusing on spring wage negotiations and the momentum of tariff policies as they examine inflation dynamics.

According to Akira Ohata from Goldman Sachs Japan, the BoJ has not yet garnered a full measure of confidence regarding its economic outlook

He pointed out the lack of clarity surrounding whether small and medium enterprises can sustain wage growth, a concern that the BoJ deems critical for accomplishing its inflation aimsJapanese labor unions typically engage in wage negotiations three months before the beginning of the fiscal year in April, which highlights the significance of this period.

Recent media reports suggest that policymakers are seeking additional time to monitor overseas risks and gather broader insights into Japan’s wage outlookThis sentiment supports the notion that the BoJ may choose to maintain its current rate in the upcoming meeting.

Shigeto Nagai, the head of Japan economics at Oxford Economics, noted in a report last week that the BoJ's ambiguous communication has now indicated that it may hold rates steady while awaiting more clarity from the spring wage negotiations and developments in U.S

policies.

Fixed wages in Japan have witnessed steady growth at a pace of approximately 2.5% to 3% per annum, while inflation has reportedly exceeded the BoJ's 2% target for a consecutive period of 30 monthsDespite the authorities' eagerness to normalize monetary policies, having faced over two decades of deflation, there lies a palpable concern regarding the implications of raising rates too swiftlyAs of October, household spending in Japan has decreased for three consecutive months, with factory output displaying instability as well.

Taisuke Tanaka, head of global market research at MUFG Bank in Tokyo, previously emphasized the shifting market expectations attributed to media reportingOvernight swap markets significantly reduced expectations for a rate hike in December, estimating the likelihood of maintaining the current rate at 77% as of Monday, a marked increase from approximately 35% at the end of November.

"Currently, based on media reports, the probability of a delayed rate hike seems to have increased," Tanaka remarked to CNBC last Friday.

“However, considering the current trend of yen depreciation and the imminent FOMC meeting prior to the BoJ's session, we must remember that if the dollar/yen approaches levels like 155, a sudden decision to raise rates is still plausible,” he remarked, referring to the upcoming Federal Open Market Committee (FOMC) meeting scheduled for this week.

On Tuesday morning, the dollar-yen exchange rate hovered around 154 yen.

At the same time, a segment of economists still envisages that the BoJ may tighten its policy this week.

Nomura is forecasting that the BoJ will increase its policy rate by 25 basis points on Thursday, citing improvements in economic and price fundamentals

Nonetheless, they also acknowledge that uncertainties surrounding U.Spolicy could delay such an action.

In a report dated December 11, research analyst Kyohei Morita stated, “We believe that if the BoJ decides to place a higher priority on uncertainties, including U.Spolicy actions and calmer market tendencies during the Christmas period, particularly in the foreign exchange markets, it may also choose to postpone a rate hike.”

The report also indicated that the uncertainties surrounding the government’s financial support to households might be another contributing factor to a potential delay in the BoJ's rate decisionWith Prime Minister Shunichi Ishiba’s administration lacking a majority in parliament, negotiations regarding raising the minimum taxable income threshold are currently underway with opposition parties.

Exchange Rate Risks

A considerable number of analysts underscore that the yen plays a pivotal role in shaping their expectations surrounding the BoJ's decision-making process.

Masafumi Yamamoto, chief economist at Mizuho Research Institute, commented, "The most significant and likely driver that can alter my expectations is the yen." He believes the BoJ might hold off on altering rates this week, possibly raising the benchmark rate by 25 basis points in January.

“Accelerated yen depreciation could unsettle the public and government, prompting the BoJ to adopt a more aggressive stance regarding interest rate hikes,” he added.

HSBC’s Asian economist Jun Ma highlighted the dual-direction risks at play.

“On one hand, a strengthening U.S