BOJ Is Said Likely to Raise Interest Rates at December Meeting

Bank of Japan Expected to Hike Interest Rates in December

The Bank of Japan (BOJ) is widely expected to raise its policy interest rate at its December meeting, potentially moving it from 0.50% to 0.75%. This would mark the first rate increase since early 2025.

Governor Kazuo Ueda has recently indicated that the economic environment is shifting, with persistent inflationary pressures and a weakening yen making a rate hike more likely. Markets have already reacted: yields on Japanese government bonds have surged, particularly the 2‑year and 10‑year yields, while the yen has strengthened against major currencies.

Reasons Behind the Likely Rate Hike

1. Inflation Remains Elevated
   Consumer prices in Tokyo, excluding fresh food, increased by 2.8% in November compared to last year. This consistent inflation signals underlying price pressures that the BOJ is likely considering.

2. Labour Market Strength
   Tight labour conditions and rising corporate profits suggest wages could continue to climb, contributing to sustained inflation.

3. Exchange Rate Effects
   The yen’s weakness has increased import costs, further fueling inflation. The BOJ appears ready to factor this into its policy decisions.

4. Political Environment
   Although Japan’s government has historically favored low rates, recent signals indicate it will not block a cautious move toward higher rates.

Market Impact and Outlook

Financial markets are pricing in a high probability of a December hike. Bond yields have risen sharply, and the yen has strengthened in response. Looking ahead, investors will monitor BOJ guidance to see whether this increase is a one-off adjustment or the start of a gradual normalization of interest rates.

The central bank faces the challenge of uncertainty around the “neutral interest rate,” estimated to be between 1% and 2.5%. This complicates long-term guidance and means future rate moves will likely be gradual.

Key Factors to Watch

• Wage and employment trends: Continued wage growth could support further rate increases.

• Currency movements: Yen fluctuations will influence inflation and BOJ decisions.

• Global economy: International trade and foreign central bank policies may affect the BOJ’s approach.

• Forward guidance: Markets will look for signals on the pace and scale of future rate adjustments.