By Lucy Raitano

LONDON (Reuters) – European companies are set to deliver a third straight quarter of profit growth, which may help to maintain newfound investor enthusiasm for the region despite political and economic turmoil and concerns over U.S. President Donald Trump’s tariffs threat.   

European stocks are trading at record highs, having outperformed Wall Street in the opening weeks of 2025, yet valuations are still rock bottom in comparison.

Investor cash has poured into the European market at the second-fastest pace in 25 years in January, according to Bank of America, even before Trump assumed the presidency and the first European company earnings began to trickle in.

Analysts are cautious, having chopped their estimates for fourth-quarter earnings growth to 1.5% from the previous year – or 4.9% excluding energy – down from an estimated 2.5% just two weeks ago, according to data from LSEG I/B/E/S.

This would still mark the third consecutive quarter of expansion with forecasts showing both profit and sales growth for the first time since the first quarter of 2023.

“There is a high chance that if companies exceed expectations during the reporting season, share prices could rise. The potential for upside is greater than the downside,” said Matthieu Dulguerov, head of equities at REYL Intesa Sanpaolo (OTC:ISNPY).

However, with Trump threatening to impose tariffs on European Union imports, and political and economic uncertainty wracking the euro zone’s growth engines – France and Germany – the mood is tense.

“We think European management teams will err on the side of caution and give wide ranges considering the uncertainty and previous difficult years in Europe,” said Bernie Ahkong, CIO Global Multi-Strategy Alpha at UBS O’Connor. He cited the uncertainty around the new U.S. administration, the Chinese economy, a key market for European exporters, and geopolitics. 

Luxury bellwether LVMH reports on Tuesday, Dutch computer chip equipment maker ASML (AS:ASML) on Wednesday, and Deutsche Bank (ETR:DBKGn) the following day. Danish drugmaker Novo Nordisk (NYSE:NVO) reports the week after.

LOWER BAR, EASIER BEATS

It’s early days for earnings, but already, Swiss luxury giant Richemont (SIX:CFR)’s shares recorded their biggest daily rise in 16 years on Jan. 16 after fourth-quarter sales smashed expectations. 

The latest surveys of business activity show the euro zone’s three largest economies – Germany, France and Italy – are stuck in an industrial recession, lagging global surveys, which have been driven by a strong U.S. economy, thereby cushioning European earnings.  

Another factor that has given European stocks a tailwind is the euro, which has lost some 4.5% in the last year. 

“Many believe Europe is facing economic challenges and will have lower growth compared to the U.S. However, most European companies are not heavily reliant on European economic growth as they operate globally,” said Dulguerov.

Goldman Sachs strategists estimate that 60% of European company revenues come from outside Europe.   

European shares are trading near their largest discount on record to the S&P 500 index, at a forward price-to-earnings ratio of around 13.3, compared with 21.6 for U.S. stocks, according to LSEG Datastream.

Many of these factors are already baked into investors’ assumptions, and for Ahkong, the commentary around full-year guidance will be key for his team taking a strong view on specific sectors. 

Investors will be poring over company announcements for any clarity on the impact of Trump’s policies on results.  

On Monday, Lanxess (ETR:LXSG) shares jumped 5.1% after the German specialty chemicals maker said it expected its fourth-quarter core profit to exceed market expectations by more than 20%, largely due to pre-buying by U.S. customers ahead of Trump’s Jan. 20 inauguration, given his threats on tariffs.

By Mike Dolan

LONDON (Reuters) – The extreme global investor bias for all things American may not need to end with some major U.S. shock, but could eventually reverse with just a modest lifting of the pervasive gloom surrounding Europe.

Many experts are wary of the scale with which the U.S. is hoovering up global investment and the resulting strength of the dollar. This is raising fears that any missteps stateside could cause a sudden reversal of these gigantic cross-border flows.

But the majority of those flows are coming from other rich economies, mostly in Europe. So the lack of a compelling case to stay at home is arguably as big a driver of the yawning geographic investment imbalances as the magnetic pull of Wall Street.

Few question the attractions of the U.S. – impressively brisk growth, giant tech investment drivers, rising productivity and now, with the return of Donald Trump to the White House, a new round of deregulation to boot.

Spurring this momentum is both the greater liquidity of U.S. markets compared to their foreign peers and the ever rising U.S. share of supposedly ‘diversified’ global equity and bond indexes. Indeed, U.S. stocks now make up two thirds of MSCI’s all-country equity basket..

But the sheer scale of negativity surrounding the economic outlook beyond U.S. shores, especially in Europe, is a major driver keeping European money moving across the Atlantic and U.S. investors at home.

To be sure, Trump’s threatened trade wars and ‘America First’ investment agenda has much to do with keeping those clouds thick and dark overseas.

The mood at the World Economic Forum on Davos this week spoke to that.

“You meet the Americans, (it’s) a real party. You meet the Europeans, it is like at a funeral,” the chief executive of Norway’s $1.8 trillion sovereign wealth fund Nicolai Tangen said of his meeting with other CEOs.

BALLOONING NIIP

The latest official U.S. net international investment position (NIIP), which measures the difference between the value of U.S. investment overseas against that of foreign holdings of U.S. securities, showed a record gap of $23.6 trillion at the end of the third quarter of 2024.

This figure shows net overseas holdings of U.S. assets – U.S. liabilities to the rest of the world – at some 90% of the country’s estimated full year gross domestic product in 2024. And the value of foreign holdings of U.S. assets has almost doubled to more than $60 trillion over the past decade.

The explosion of the NIIP gap is partly due to the scale of price outperformance of U.S. securities over foreign securities held by U.S investors. The dollar’s rising exchange rate is also playing a role. But, even more importantly, the underlying flows just keep coming.

The Bureau of Economic Statistics last month said that additional foreign purchases of U.S. debt and equity securities in the third quarter of last year alone amounted to some $717 billion, stripping out valuation effects.

Where does all the money keep coming from?

One big player stands out. Germany overtook Japan last year as the world’s largest net outward investor, with its contrasting NIIP surplus now soaring above $3 trillion to more than 70% of German GDP and double the share it recorded only a decade ago.

So much so, the entire euro zone NIIP flipped into net surplus for the first time two years ago.

As a share of GDP, Switzerland is another big outward investor – in part due to the Swiss National Bank’s near $1 trillion reserve pile. Sweden’s ranking is rising too.

“STUPIDLY BIG”

Societe Generale (OTC:SCGLY) strategist Kit Juckes described the U.S. NIIP deficit at $23 trillion as a “stupidly big number” that raises reasonable questions about its long-term sustainability.

“If this transpires to be some form of bubble in the U.S. equity market, I struggle to believe $23 trillion is just going to go back to $21.5 trillion. When it re-balances it’s going to be a very big move indeed.”

But Juckes noted that a major driver of the imbalances was the fact that European investors can’t find anything more attractive at home. If this perspective changes, the massive bias toward U.S. markets could possibly ‘lighten up’.

To that effect, the new year has provided some shards of light. Euro zone stocks have actually outperformed U.S. indexes two-to-one in dollar terms for the year so far. Drawing funds interest in the extremity of the Transatlantic valuation gap, it’s a notable rarity over any timeline recently.

Meanwhile, Bank of America’s latest fund manager survey revealed this week that global funds recorded the second largest allocation to European stocks in a quarter of a century.

A flash in the pan or a portent of things to come?

Ironically, Trump may hold the keys to that. If successful, his push for an end to the war in Ukraine could do much to lift the mood on the eastern side of the Atlantic. Backing away from tariff hikes on Europe would obviously be another major relief for the continent.

Germany’s election next month could also possibly generate more optimism, if the outcome signals that there will be a review of the country’s draconian public spending limit.

Valuations in the U.S. and investor positioning are already at extremes. All that may be needed is a trigger and a narrative.

The opinions expressed here are those of the author, a columnist for Reuters.

By Ariba Shahid

KARACHI (Reuters) – Pakistan’s central bank is expected to lower its key interest rate by at least 1 percentage point on Monday, analysts said, in its sixth straight cut as it attempts to revive economic and business sentiment as inflation slows sharply.

The central bank has slashed rates by 900 bps from an all-time high of 22% in June 2024, in one of the most aggressive moves among emerging markets’ central banks and topping the 625 bps in rate cuts it did in 2020 during the COVID-19 pandemic.

The median expectation of the fifteen analysts surveyed by Reuters is for the State Bank of Pakistan to lower rates by 100 basis points (bps). Only one analyst expects the bank to hold rates at 13%.

Of the 14 analysts who expect a rate cut, 11 expect a 100 bps reduction, one expects the central bank to lower rates by 150 bps and two expect it to chop rates by 200 bps.

Ahmad Mobeen, senior economist at S&P Global Market Intelligence, said his forecast for a 150 bps cut was “driven by the low December inflation figure and a stable exchange rate supported by a healthier current account.”

The South Asian country is navigating a challenging economic recovery path and has been buttressed by a $7 billion facility from the International Monetary Fund (IMF) in September.

Pakistan’s consumer inflation rate slowed to an over 6-1/2-year low of 4.1% in December, largely due to a high year-ago base. That was below the government’s forecast and significantly lower than a multi-decade high of around 40% in May 2023.

The central bank, in its policy statement in December, noted that it expected inflation to average “substantially below” its earlier forecast range of 11.5% to 13.5% this year.

However, inflation may pick up in May as the base year effect wears off, said Saad Hanif, research analyst at Ismail Iqbal Securities.

That is “in addition to other risks to inflation including increases in energy tariffs, new taxation measures, and a potential hike in the levy on petroleum prices,” said Hanif, who expects a 100 bps cut.

# Name/ Organization Expectation

1. Al Habib Capital Markets -100

2. Ammar Habib Khan -100

3. Arif Habib Limited -100

4. AWT Investments 0

5. Equity Global -100

6. FRIM Ventures -100

7. Intermarket Securities -100

8. Ismail Iqbal Securities -100

9. JG Global -100

10. K Trade -100

11. Lakson Investments -200

12. Pak Kuwait Investment Company -100

13. S&P Global Market Intelligence -150

14. Topline Securities -100

15. Uzair Younus -200

Median -100

(Reuters) -The Bank of Japan raised interest rates on Friday to their highest since the 2008 global financial crisis and revised up its inflation forecasts, underscoring its confidence that rising wages will keep inflation stable around its 2% target.

At its two-day meeting concluding on Friday, the BOJ raised its short-term policy rate from 0.25% to 0.5% – a level Japan has not seen in 17 years. It was made in an 8-1 vote with board member Toyoaki Nakamura dissenting.

Following are excerpts from BOJ Governor Kazuo Ueda’s comments at his post-meeting news conference, which was conducted in Japanese, as translated by Reuters:

WAGE HIKE

“Many firms are saying they will continue to raise wages … Various data shows the U.S. economy is in firm shape. Markets have been stable as the broad direction of Trump’s policies become clearer. While import price growth is subdued on a year-on-year basis, the weak yen is pushing up import costs.”

POLICY RATE

“There’s no change to our view of raising our policy rate and adjusting the degree of monetary support if the economy and prices move in line with our forecasts.”

“The timing and pace of adjusting monetary support will depend on economic and price developments at the time. We don’t have any preset idea. We will make a decision at each policy meeting by looking at economic and price developments as well as risks.”

SHARP UPGRADE IN INFLATION FORECASTS

“The rise in underlying inflation is moderate. I don’t think we are seriously behind the curve in dealing with inflation.”

IMPACT OF TRUMP’S TARIFF POLICIES

“There’s very high uncertainty on the scale of tariffs. Once there is more clarity, we will take that into our forecasts and reflect them in deciding policy.”

“It’s necessary to raise interest rates in accordance with developments in the economy and prices. We also need to see how our rate hikes affect the economy. It’s therefore appropriate to gradually raise interest rates in several stages, while carefully examining the impact of our moves.”

TERMINAL RATE

“There’s no change to our view on the neutral rate, which in our estimate is spread in a wide band. The estimated band hasn’t changed much. In terms of the distance to the neutral rate, it’s true it has shortened after raising rates to 0.5%. But there’s still quite some distance.”

“The BOJ’s estimate shows the neutral rate, in nominal terms, is in a range of 1%-2.5%. There’s still some distance to that range, given the short-term rate is 0.5%. Of course, we need to deepen analyses on where the neutral rate is as this could be affected by demographics and structural changes in the economy. We’ll try our best. But it’s hard to know this real time.”

ON WHETHER JAPAN IS STILL IN DEFLATION

“The government has a slightly different definition of deflation compared with ours, as we focus on sustainably achieving our 2% inflation target… In terms of the common definition of deflation, which is for an economy to avert falling prices, it seems like Japan has moved away from this quite a bit. Of course, the risk of Japan returning to deflation again in the long run is not zero. But the chance seems quite low.”

“The sharp rise in inflation during fiscal 2025 is mostly due to cost-push pressures expected in the first half of that year, which is likely to dissipate in the latter half. As such, if wages rise steadily, we can expect real wages to turn positive.”

By Jiaxing Li and Ankur Banerjee

HONG KONG/SINGAPORE (Reuters) – New shades of capitalism are emerging in China’s tuckered out stock market as companies, at Beijing’s behest, buy back their shares and pay record dividends to investors lying in wait for a so-far evasive rebound.

Investors say the record spree of share buybacks and dividend payouts mark a cultural shift in the market, turning the spotlight on shareholder returns akin to the ongoing corporate governance makeover in Japan.

The dividend yield on Chinese stocks has risen to around 3%, the highest since 2016, rewarding investors who have bravely stayed invested in a market that has been limp for years and faces more stress after Donald Trump’s return as U.S. president.

“China’s regulators and policymakers are trying to engineer this culture of shareholder return,” said Jason Lui, head of Asia-Pacific equities and derivatives strategy at BNP Paribas (OTC:BNPQY).

“If that can be successfully engineered, it will change the makeup of the capital market, and you’ve seen some early sign of that,” referring to increased shareholder returns.

The buybacks and dividends were introduced as part of proposals by Chinese authorities in September to lift stock prices and boost consumer sentiment.

The benchmark CSI 300 index has struggled in recent years, down more than 27% since 2021 against a 65% rise for the S&P 500. The market value of Chinese stocks has stagnated for a decade at around $11 trillion.

Lingering concerns over the indebted property sector, deflationary pressures, lack of big stimulus and geopolitical tensions have hurt sentiment, causing a foreign investment exodus. The threat of tariffs from Trump is another worry.

Even after Beijing showed willingness to boost the market in September, stock prices have lost momentum. The CSI300 index surged 40% in the two weeks after the first stimulus announcements but disappointment with the degree and pace of implementation has seen gains halve since then.

“The simple way to look at it, you should be paid enough of a dividend … for you to take the pain of the fact that the recovery might not happen in valuations,” said Bhaskar Laxminarayan, chief investment officer for Asia at Julius Baer (SIX:BAER).

“You’re being paid for that patience. If you’re not, then it’s not worth it.”

BIG DATA

Chinese firms distributed dividends totalling a record 2.4 trillion yuan ($329.7 billion) in 2024. Share buybacks too rose to a record high 147.6 billion yuan last year, data from regulators showed.

Wu Qing, head of the China Securities Regulatory Commission, said on Thursday that more than 310 companies are expected to pay out dividends totalling more than 340 billion yuan in December and January.

That is a 9-fold increase in the number of companies and a 7.6-fold rise in dividend amount versus the same period last year.

In a sign of how the market is maturing into one where shareholder return is becoming a differentiator, investors have been steadily pouring into dividend-themed exchange-traded funds (ETFs), with nearly $8 billion of inflow since 2020, compared with just $273 million in the previous five years, LSEG Lipper data showed.

The CSI Dividend Index – comprised of traditional energy, financial and material companies that yield high dividends – is up 20% in the past five years compared with a drop of about 8% for the blue-chip CSI300 index.

The CSI growth index sank 25% in the same period.

CULTURAL SHIFT

Policy measures, including a 300 billion yuan share buyback financing programme and guidelines requiring mainland companies to improve shareholder returns and valuations, have helped sharpen the focus on higher-yielding firms.

“China was never a dividend-yielding asset class as a whole, because it was always seen as a growth-oriented play. But now I think we’re in a nice sweet spot where you have both growth and yield,” said Nicholas Chui, China portfolio manager at Franklin Templeton.

Roughly two-thirds of the stocks in Chui’s portfolio are now yielding at least 2%, which is “not just a deliberate allocation on my part, but really the entire market has gone up in yield,” Chui said. “It’s a change in culture.”

Rising dividends also prevent income-seeking mainland investors from rushing into bonds, as they have done for months. The dividend yield is now well above the 1.7% they can earn on 10-year government bonds.

Shares of battery maker Contemporary Amperex Technology and e-commerce behemoth Tencent rose after the companies announced buybacks or dividend payouts.

Goldman Sachs estimates Chinese companies listed at home and abroad could return a total 3.5 trillion yuan to shareholders in 2025, a jump of over 17%.

“Companies don’t know where to put their cash, so they return it now to shareholders. This is a very big shift in mindset,” said Herald van der Linde (NYSE:LIN), head of equity strategy for Asia-Pacific at HSBC.

“I think 10 years ago, you wouldn’t have expected this.”

($1 = 7.2798 Chinese yuan)

By Kevin Buckland

TOKYO (Reuters) – The yen strengthened and Japanese government bond yields rose to fresh multi-year highs on Friday after the Bank of Japan hiked interest rates as expected and raised its inflation forecasts.

Japan’s Nikkei share average pared earlier gains to up 0.26% at 40,062.48 as of 0405 GMT, after ending the morning session up 0.6%.

The yen was about 0.5% stronger at 155.32 per dollar, after initially swinging between small gains and losses immediately after the decision, which came close to the end of the stock market’s midday recess.

The two-year JGB yield ticked up an additional half a basis point (bp) after the policy announcement to be 1 bp higher at 0.705% on the day, a level last seen in October 2008. The five-year yield climbed 2 bps to 0.895%, the highest since December 2008.

The BOJ hiked short-term lending rates by a quarter point to 0.5%, which had been already priced into money markets after central bank officials, including Governor Kazuo Ueda, had clearly signalled earlier this month that policy tightening was on the table.

In its quarterly outlook report, the board raised its forecast for core consumer inflation to hit 2.4% in fiscal 2025 before slowing to 2.0% in 2026. In the previous projection made in October, it expected inflation to hit 1.9% in both fiscal 2025 and 2026.

Investor focus now falls on Ueda’s news conference, scheduled for 0630 GMT, for clues on the pace of further tightening. The market is currently priced for one further quarter-point increase by year-end.

“I expect the rate will be kept the same for at least the next six months,” keeping the pace broadly the same with hikes so far this cycle, said Kota Suzuki, a strategist at Nomura Asset Management.

“The central bank will be a little more cautious from now on as it will carefully assess the economic situation and the impact of the interest rate hike.”

Early gains in Japanese stocks came on the back of a 0.5% rise in the U.S. S&P 500 (SPX) overnight to mark its first closing record since Dec. 6.

The yen was supported by comments from U.S. President Donald Trump that he thought he could reach a trade deal with China and avoid additional tariffs.

Investing.com– The Bank of Japan raised interest rates by 25 basis points, as expected, with the central bank forecasting that inflation will remain underpinned and around its annual target in the coming years. 

The BOJ slightly trimmed its gross domestic product forecasts for fiscal 2024 and 2025, while raising its forecasts for inflation. 

The BOJ raised its benchmark overnight interest rate by 25 basis points to around 0.5%, in line with analyst expectations. The hike is the central bank’s third raise since it began scaling back its ultra-loose monetary policy in early-2024. 

The BOJ signaled that if its economic forecasts were met in the coming months, it will hike interest rates further.

“Given that real interest rates are at significantly low levels, if the outlook for economic activity and prices presented in the January Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation,” the BOJ said in a statement. 

Friday’s hike comes just hours after consumer price index data showed Japanese inflation rose further in December and remained above the BOJ’s 2% annual target. 

The BOJ said policymakers expect CPI to average around 2.6% to 2.8% in fiscal 2024, slightly above prior expectations of 2.4% to 2.5%. Their CPI outlook for 2025 is at 2.2% to 2.6%, much higher than prior forecasts of 1.7% to 2.1%.

On the growth front, gross domestic product is expected around 0.4% to 0.6% in fiscal 2024, down slightly from prior forecasts, while GDP for 2025 is expected around 0.9% to 1.1%. 

The BOJ’s tightening cycle was sparked largely by expectations of a virtuous cycle of higher wages and increasing private consumption, with recent data showing both trends remained squarely in play.

The central bank recently signaled that it expects 2025 springtime wage negotiations to once again yield a bumper hike in wages, giving it more headroom to keep raising interest rates.

But analysts only expect the BOJ to next raise rates by July, after the conclusion of Japan’s upper house elections offers more political clarity. 

Policymakers are also on edge over U.S. President Donald Trump’s plans for increased trade tariffs, which could impact Japanese exporters while also denting the yen. 

SINGAPORE (Reuters) – The Bank of Japan raised interest rates on Friday to their highest since the 2008 global financial crisis, underscoring its confidence that rising wages will keep inflation stably around its 2% target.

The board decided to raise the BOJ’s short-term policy rate to 0.5% from 0.25% by an 8-1 vote. Board member Toyoaki Nakamura dissented to the decision.

QUOTES:

NAOYA HASEGAWA, CHIEF BOND STRATEGIST AT OKASAN SECURITIES, TOKYO

“The decision was in line with our expectations. We await comments from BOJ Governor (Kazuo) Ueda at his post-meeting news conference. We want to know his outlook for the future rate path, rather than why the BOJ raised rates at this meeting. The market now expects that the BOJ raises rates every six months so we want to know Ueda’s view on that.”

MATT SIMPSON, SENIOR MARKET ANALYST, CITY INDEX, BRISBANE

“The hike may have been expected but in what feels like the first time in a very long time, there were no major downgrades to their economic outlook. This keeps the door open to another 25bp hike by the year-end, and rates to sit at a whopping 0.75%.”

TAKAHIRO OTSUKA, SENIOR FIXED INCOME STRATEGIST AT MITSUBISHI UFJ MORGAN STANLEY SECURITIES, TOKYO

“The outcome was as expected, but it seems to be a little hawkish with the BOJ raising its inflation forecast. We want to check comments from (BOJ Governor Kazuo) Ueda to confirm the BOJ’s stance.”

KIERAN WILLIAMS, HEAD OF ASIA FX, INTOUCH CAPITAL MARKETS, LONDON

“The statement is something of a Rorschach test; hawks are pointing to the reiterations that price risks are skewed to the upside and that the BOJ will continue to hike if the economy evolves in line with the outlook… while doves are clinging to the dovish dissent from Nakamura, negative real wage mentions, notes of caution and the line that easy financial conditions will be maintained.”

“The evolution of yen price action throughout the day will depend on the tone adopted by BoJ Governor Ueda at the press conference.”

JOSEPH CAPURSO, HEAD OF INTERNATIONAL AND SUSTAINABLE ECONOMICS, COMMONWEALTH BANK OF AUSTRALIA, SYDNEY

“They dropped a lot of hints in the media that they might do this, and they’ll probably hike again this year, we think they’ll probably hike two more times this year. But they might decide to wait for some time between rate hikes… so we think they’ll probably hike again mid-year.”

TOM NAKAMURA, CURRENCY STRATEGIST AND CO-HEAD OF FIXED INCOME, AGF INVESTMENTS, TORONTO

“A 25 basis point hike to 0.5%, as broadly expected, but inflation forecast raised for both headline and core. I think there was a risk that the Bank of Japan would lean more dovish in their assessment, but this reinforces the broader market expectation for another 25 bps hike later in the year.”

“The market reaction should be neutral, perhaps on the margin mildly bullish for the yen and slightly higher Japanese government bond yields. Ueda’s press conference will be key… for references to the perceived neutral rate and how it would influence the pace and extent of future policy changes.”

NAKA MATSUZAWA, CHIEF MACRO STRATEGIST, NOMURA, TOKYO

“Their logic remains the same. They are still far away from neutral, so it’s natural to make an adjustment. It’s not necessarily a tightening, rather a lesser easing, in a sense.”

“Unless the BOJ either changes the logic of rate hikes, or even raises the neutral point, which they have been mulling – about 1% – there’s not going to be much room for the market to price in further hikes in the future.”

MASATO KOIKE, SENIOR ECONOMIST, SOMPO INSTITUTE PLUS, TOKYO

“The focus of Ueda’s press conference would be about what was different this time in terms of the available information compared to December. Certainly, there have been new inputs such as BOJ Branch Managers’ Meeting and U.S. President Donald Trump’s inaugural speech, but at least Japan’s wage situation has not changed much. I’m wondering how Governor Ueda will explain that.”

“The terminal rate is also a point of interest. The economy would stay on-track (to the BOJ’s forecast), but it is questionable if inflation will stay stably above 2% toward the end of FY25. If goods price inflation slows and is not fully passed on to service prices, the BOJ may not be able to raise rates beyond 1% and stop at around 0.75%.”

CHRISTOPHER WONG, CURRENCY STRATEGIST, OCBC, SINGAPORE

“Dollar/yen went both ways likely in reaction to the non-unanimous vote, but it subsequently eased. The upward revision to CPI forecast also exudes a sense of confidence the policymakers have with regard to inflation and the economy meeting expectations. The focus next is on Governor Ueda’s press conference.”

HIROFUMI SUZUKI, CHIEF FX STRATEGIST, SMBC, TOKYO

“The rate hike itself was fully priced in, as it had been widely reported beforehand. The rate hike was as I expected, and I now predict that the Bank of Japan will implement rate hikes every six months going forward.”

“Due to the significant upward revisions to the inflation outlook for fiscal years 2025 and 2026, the USD/JPY reacted with yen appreciation. Governor Ueda’s comments on exchange rates during the press conference (will also) draw attention.”

BEN BENNETT, ASIA-PACIFIC INVESTMENT STRATEGIST, LEGAL AND GENERAL INVESTMENT MANAGEMENT, HONG KONG

“The decision was well-telegraphed. The backdrop of elevated global yields and a strong dollar is supportive for such a move, reducing the likelihood of a repeat of the summer market meltdown when a Japanese rate hike led to a spike in the yen.”

“Today’s move is still yen positive, but I’m not surprised the market reactions have been modest.”

KOTA SUZUKI, STRATEGIST, NOMURA ASSET MANAGEMENT, TOKYO

“I expect the rate will be kept the same for at least the next six months. This rate hike took six months from the last time. The central bank will be a little more cautious from now on as it will carefully assess the economic situation and the impact of the interest rate hike.”

“If the rate hike were to be brought forward, it would probably be due to the depreciation of the yen, which would have an impact on prices through rises in import prices.”

“When the interest rate hike is postponed, it’s because of economic uncertainty both in Japan and overseas.”

TAKESHI MINAMI, CHIEF ECONOMIST, NORINCHUKIN RESEARCH INSTITUTE, TOKYO

“The BOJ put the price outlook above 2% for both fiscal 2025 and 2026, revised up from the previous forecasts of 1.9% for both years. This indicates that the BOJ would continue raising interest rates through 2026, against some market expectations that rate hikes will stop when the policy rate hits 0.5%-1%.

“Whether the BOJ can do so will probably depend on oil prices and foreign exchange rates… I don’t think the underlying inflation is still strong enough to reach 2%. I expect the BOJ to stop rate hikes sometime in fiscal 2025.”

SHOKI OMORI, CHIEF GLOBAL DESK STRATEGIST, MIZUHO SECURITIES, TOKYO

“This rate hike had been fully priced in, resulting in no significant volatility.”

“For the Outlook Report, it has been noted that the inflation forecast has been revised upward due to cost-push factors. Although comments on rice prices had been reported in advance, this emphasis may be intended to highlight the upward revision of the inflation outlook driven by cost-push elements. There may be caution in stressing the advancement of demand-pull inflation at this juncture, possibly due to concerns that it could significantly elevate expectations for policy rate hikes.”

“A preliminary review of the Outlook Report suggests that while further interest rate increases are anticipated in the future, there is an emphasis on maintaining flexibility regarding the timing and terminal rate.”

A look at the day ahead in European and global markets from Tom Westbrook

A rate hike in Japan added momentum to a tide of dollar selling in the Asia session, as the first week of Donald Trump’s presidency has turned out to be less aggressive on the trade policy front than many in the markets had expected.

The dollar is down about 1.7% on the euro this week and a touch further on sterling. The dollar index is down 1.5%.

Tariffs are seen as positive for the dollar because the U.S. is a big importer and, in theory, if exporting countries can’t find alternative customers, they may weaken their currencies to offset the trade levy and preserve market share.

Tariffs do sound as though they are coming, but the rough conclusion from a few days of Trump’s second term seems to be that they will be subject to negotiation.

In a Fox News interview, Trump said he would rather not use tariffs against China and that a phone call with Chinese President Xi Jinping last week was friendly.

Trump had earlier told the World Economic Forum in Davos, via video link from Washington, that he wanted the U.S.-China trade relationship to be “fair”.

“We don’t have to make it phenomenal,” he said.

Hong Kong’s Hang Seng was up 1.8% through the morning session. China’s yuan hit a six-week high against the dollar.[.HK][CNY/]

The China-sensitive Australian dollar hit a five-week peak, and MSCI’s index of Asian emerging market currencies was heading for its largest one-week percentage gain in 18 months. [AUD/][EMRG/FRX]

The Bank of Japan lifted short-term interest rates to 0.5%, their highest in 17 years. Although the move was expected, traders pushed the yen about 0.6% higher to 155.12 per dollar.

The focus now moves over to a news conference by BOJ Governor Kazuo Ueda at 0630 GMT. British and European PMI figures are due later in the session, with services seen outpacing manufacturing.

Futures indicate a broadly steady open for Wall Street, putting the S&P 500 – which notched a record closing high on Thursday – on course for a weekly gain. [.N]

Key developments that could influence markets on Friday:

– British and European PMIs

(By Tom Westbrook; Editing by Edmund Klamann)

Investing.com– The Federal Reserve is expected to largely disregard any inflationary effects stemming from tariffs under Donald Trump’s administration, as such impacts are viewed as one-time price level increases rather than persistent inflationary pressures, Goldman Sachs analysts said in a research note.

However, analysts acknowledged concerns that tariffs could lead to higher inflation expectations, a development that might constrain the Fed’s policy flexibility. These expectations could become more sensitive given the recent surge in inflation, they said.

Goldman Sachs cited economic studies showing that individuals’ lifetime inflation experiences significantly shape their inflation expectations. Using data from the University of Michigan’s consumer sentiment survey, the analysts noted that recent inflation experiences, particularly in highly visible areas like gasoline prices, have an outsized impact on public sentiment.

Based on these findings, the analysts projected that tariffs, under their baseline scenario, would have minimal effects on inflation expectations. Even in a scenario involving a 10% universal tariff, one-year inflation expectations might rise by 0.5 percentage points, and five-year expectations by just 0.1 percentage points.

However, Goldman Sachs warned that tariffs could have a larger psychological impact if price increases garner significant media attention, akin to gasoline price spikes. Recent jumps in Michigan inflation expectations and frequent mentions of tariffs in survey responses suggest that such effects are plausible, analysts stated.

This heightened public sensitivity to tariff-driven price changes might influence policymakers. The Federal Open Market Committee (FOMC) could refrain from cutting rates under such circumstances, while the White House might face pressure to limit further tariff increases, the analysts concluded.