Sources indicate that key officials in the Sanae Takaichi administration would not block a potential Bank of Japan (BOJ) rate hike in December, despite opposition from some senior figures. This stance raises the likelihood of a 25-basis-point increase at the BOJ's December 19 policy meeting. As of press time, USD/JPY fell to 154.81, while Japan’s 2-year government bond yield climbed to 1.022%.
Reports on Thursday cited three government sources suggesting the BOJ is likely to raise rates this month, with the administration tolerating the move. Although the BOJ operates independently, a 2013 agreement mandates policy coordination to combat deflation and sustain growth. Prime Minister Takaichi, known for supporting monetary easing, had sparked speculation about delaying hikes, but analysts note fading political pressure to maintain ultra-low rates. Former BOJ executive Kazuo Momma predicts Takaichi will permit tightening, given her focus on easing household inflation burdens.
BOJ Governor Kazuo Ueda recently signaled hawkish intent, stating the central bank would "assess the timing of policy adjustments" amid economic conditions. His reference to a specific meeting—similar to last December’s pre-hike language—hints at imminent action. Other policymakers, including board members Hajime Takata and Junko Nakagawa, also endorsed normalization, while even dovish member Asahi Noguchi warned against delayed adjustments.
Supporting the case for tightening, Tokyo’s November core CPI (ex-fresh food) rose 2.8% YoY, matching October’s pace, while industrial output surged 1.4% MoM in October, defying forecasts. Early 2026 wage talks also point to robust pay gains, with Japan’s largest union targeting ≥5% raises—echoing this year’s historic settlements.
**Global Ripple Effects** Ueda’s comments pushed Japan’s 2-year yield above 1% for the first time in 17 years, triggering bond selloffs worldwide, including in U.S. and European debt. Manulife’s Matt Miskin noted "butterfly effects" from the BOJ’s shift, as higher domestic yields may prompt Japanese investors to repatriate funds, reducing foreign bond demand. State Street’s Michael Metcalfe warned this could strain global debt markets amid heavy sovereign issuance.
A retreat from U.S. Treasuries might lift the 10-year yield—the "anchor" for global assets—while unwinding Japan’s $5 trillion carry trade (borrowing cheap yen for higher-yielding assets) could mirror August 2023’s turmoil, when BOJ-Fed policy divergence triggered a 12% Nikkei 225 crash. Analysts caution that while a repeat is unlikely, yen strength and rising JGB yields may tighten liquidity, pressuring emerging markets and growth stocks.
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