Early election news disrupts the market! JP Morgan: The Bank of Japan is expected to stay put next week, with economic outlook and speeches from Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda to be the focus.

The Bank of Japan will announce the latest interest rate decision on January 23. JPMorgan released a research report stating that the likelihood of the Bank of Japan taking action at its policy meeting next week is quite low. Instead, market attention will focus on its "Economic and Price Outlook Report" and the remarks of Bank of Japan Governor Kuroda at the press conference. JPMorgan stated that they will search for clues regarding the conditions for the next rate hike. The bank still expects the Bank of Japan to raise interest rates in April, when the results of spring wage negotiations, including for small and medium-sized enterprises, will become clearer. JPMorgan pointed out that the Bank of Japan's policy meeting in January would not have attracted much attention originally, but due to reports that Japanese Prime Minister Sanae Takaichi intends to dissolve the House of Representatives on January 23 and hold early elections, long-term Japanese government bond yields and the USD/JPY exchange rate have both risen. This is because the market expects Takaichi's Liberal Democratic Party to win more votes in the potential election, fueling hopes for the comeback of the "Takaichi trade" - a situation where the stock market rises and the yen weakens based on Takaichi's expansionary fiscal policy and loose monetary policy stance. If Takaichi dissolves the House of Representatives on January 23, the press conference by the Bank of Japan Governor on the same day will attract high market attention. Considering the need to address both the Japanese government bond market and the foreign exchange market, the Bank of Japan may not be able to formulate a clear optimal communication strategy. Therefore, JPMorgan expects that the Bank of Japan will stick to its current policy stance at that time. JPMorgan stated that Kuroda may face many questions at the press conference about how the Bank of Japan will respond to the Takaichi government's "responsible, proactive fiscal policy," as well as the depreciation of the yen and the rise in Japanese government bond yields. The Bank of Japan may view the recent increase in market expectations for its terminal interest rate as a positive development. However, despite the rise in terminal interest rate pricing, the yen continues to be weak, indicating that the Bank of Japan may be lagging behind the increasingly expansive fiscal policy, and catching up may not be easy - this is exactly one of the market's concerns. So far, due to concerns about the impact of policy normalization on the financial system, the Bank of Japan has maintained a negative stance towards consecutive rate hikes. The reluctance of the Japanese government to raise policy rates also puts pressure on the Bank of Japan. Whether the recent depreciation of the yen will lead to a change in this stance is a key point to watch. JPMorgan pointed out that the Bank of Japan remained cautious until October last year, strongly warning of the downside risks to the economy posed by U.S. tariffs. However, this view is now outdated. Given the resilience of the Japanese and global economies, the Bank of Japan may slightly revise its economic growth forecast based on the supplementary budget passed recently. On the other hand, the inflation outlook is slightly more complex. This report will take into account factors such as gasoline tax cuts and electricity subsidies not considered in the October "Economic and Price Outlook Report." Although these factors should normally lead to a downward revision of inflation expectations, the Bank of Japan is likely to largely maintain its inflation forecast unchanged, thus essentially raising its core inflation forecast excluding policy effects.