The Bank of Japan is preparing for the next interest rate hike, though the exact timing and extent remain uncertain, drawing significant market attention. Recent statements by Bank of Japan Governor Kazuo Ueda indicate that Japan's economy is moving towards wage-driven inflation, which could be a major driver for another rate hike. The market is closely monitoring multiple factors, including neutral rates, the yen's trajectory, and key economic data.
Background to the Bank of Japan's Rate Hike
In March of this year, the Bank of Japan ended its prolonged negative interest rate policy and raised the short-term policy rate to 0.25% in July. Recently, Kazuo Ueda stated that a rate hike can promote the long-term stability and growth of the economy by increasing borrowing costs. This view is similar to the stance during the BOJ's last rate hike cycle in 2007, which aimed to prevent an economic bubble but was later curtailed by the global financial crisis, leading rates to be lowered back to zero.
Ueda believes that as wage increases drive consumption growth, the conditions for a rate hike are gradually maturing. Although he cautioned about the risks posed by the uncertainty of the U.S. economy and market volatility, he also mentioned that the Bank of Japan does not need to wait for all risks to be eliminated before taking action. This suggests that the Bank of Japan might consider another rate hike at the December 18-19 meeting.
The Debate on Neutral Rates
One key focus of market attention is the neutral rate, which is seen as a level that neither stimulates nor restrains economic growth. The Bank of Japan estimates the neutral rate to be between -1% and +0.5%, meaning that even if the short-term rate is raised to 1%, the impact on the economy remains within a controllable range. However, Ueda also acknowledged that due to the influence of long-term low-interest policies, the foundation for Japan's neutral rate data is not abundant.
The Bank of Japan's latest forecast indicates that the short-term policy rate may gradually approach the neutral level over the forecast period ending in March 2027. Board member Naoki Tamura previously stated that Japan might need to raise rates to at least 1% by the end of 2025. Nonetheless, other board members remain cautious on this issue, reflecting internal differences in opinion.
Key Triggers and Data to Watch
The weak yen was one of the reasons behind the BOJ's decision to raise rates in July, as it drove up import costs and inflation. Looking ahead, the yen's trajectory will continue to be a crucial consideration in rate hike decisions. Additionally, the unpredictability of President-elect Trump's policies adds complexity to the Bank of Japan's decision-making process. The market generally believes that Trump's policies could increase inflation and limit the Federal Reserve's room to cut rates, thereby exerting pressure on the yen's exchange rate.
The future decisions of the Bank of Japan will also be influenced by various economic data, including the release of October CPI data on November 22, and the quarterly business survey "Tankan" report on December 13. If these reports show growing business confidence and inflation expectations, the likelihood of a BOJ rate hike in December will significantly increase.
Outlook
Although there is still policy uncertainty at the Bank of Japan, Kazuo Ueda's recent statements have signaled to the market the potential for further rate hikes. As the December meeting approaches, the market will closely monitor economic data, yen trends, and international factors influencing the Bank of Japan's decisions. The BOJ's future policy adjustments will not only impact the domestic economy but could also trigger ripple effects in the global monetary policy landscape.
