The Bank of Japan could hike interest rates by as soon as May, ING analysts said in a Monday note, as gross domestic product data showed the economy grew much more than expected in the fourth quarter of 2024.

A May rate hike could come especially if springtime wage negotiations between major Japanese labor unions and employers yields another year of bumper hikes.

Strong wage hikes in 2024 were a key motivator of the BOJ's ongoing rate hike cycle, as Japanese private consumption and inflation picked up sharply through most of 2024.

The BOJ expects this trend to continue in 2025, underpinning the central bank's outlook for a virtuous cycle of higher wages and improving growth.

Monday's GDP reading furthered this notion. The economy grew 0.7% quarter-on-quarter in Q4, much more than expectations of 0.3%. Year-on-year growth came in at 2.8%, well above estimates of 1%.
The Q4 reading was driven chiefly by strong capital spending and export demand, while private consumption growth moderated to 0.1% from 0.7% in the prior quarter. But growth in consumption was still above expectations for a contraction of 0.3%.

ING analysts noted that Monday's data was stronger than the BOJ's current GDP forecast, underpinning expectations of high inflation.

"Current market pricing dynamics suggest a rate hike in July, but we believe that the BoJ may act as early as May. According to a local news report, the outcome of Spring wage negotiations is likely to be as strong as last year," ING analysts wrote in a note.
The BOJ raised interest rates by 25 basis points during its January meeting, and signaled that it still planned to raise rates further in 2025. Recent comments from BOJ hawk Naoki Tamura suggested that the BOJ will hike rates to 1% by the end of the year, heralding at least 0.5% worth of hikes.

Source: Investing.com