After an 11-month wait, the Bank of Japan (BOJ) is finally set to end its policy pause. Since its last tightening move in January, the BOJ has maintained its policy rate target at 0.5%. This prolonged inaction stemmed largely from uncertainties tied to U.S. tariffs, while policymakers also sought concrete evidence of the economic and wage growth the central bank desires.
With tariff-related concerns easing and inflation proving persistent, conditions now appear ripe for a rate hike.
Market Insight: Recent remarks by BOJ Governor Kazuo Ueda have fueled expectations of an imminent hike, with markets nearly fully pricing in a December move. If implemented, the BOJ’s policy rate would rise from 0.5% to 0.75%, marking a 30-year high. However, sources familiar with the central bank’s thinking suggest that even then, inflation-adjusted rates would remain low, limiting the impact on the real economy.
Key Focus: With trade uncertainties receding, wage growth momentum has become a critical factor in the BOJ’s timing. As clear signs may not emerge until March next year, Governor Ueda has indicated close monitoring of early signals in corporate wage plans for 2025. A recent BOJ report noted many Japanese firms intend to maintain this year’s pay raises through 2026, potentially bolstering confidence for policy normalization.
Political Pressure: Until recently, markets assumed Prime Minister Sanae Takaichi—seen as supportive of loose monetary policy—would oppose tightening. Yet the yen’s rapid depreciation has reignited import-price concerns, leaving the government little choice but to back a hike to curb currency weakness. Containing living-cost pressures is a priority for the Takaichi administration, which seeks to avoid further consumer-price spikes. BOJ officials also grow wary of sustained rises in essentials like food, squeezing household budgets.
Outlook: While a December hike seems certain, confidence about further tightening remains scarce. The BOJ estimates Japan’s neutral rate—neither restrictive nor stimulative—lies between 1.0% and 2.5%. Sources say narrowing this range is unlikely soon, with even BOJ watchers divided on neutral-rate estimates. Governor Ueda has pledged updated projections once more data is available.
Next Steps: Any additional tightening is expected to proceed cautiously, with the BOJ assessing how the economy—including loan activity—responds to rate levels unseen in decades. Many economists, including JPMorgan’s Ayako Fujita, anticipate hikes roughly every six months, though timing may hinge on the government’s macroeconomic stance. “Markets may doubt the BOJ’s ability to normalize policy without government friction,” Fujita noted. “The yen-depreciation-driven hike pattern could persist into next year, but how Governor Ueda addresses these concerns will be key.”
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