Following speculation that Prime Minister Sanae Takaichi might call a lower house election next month, Bank of Japan Governor Kazuo Ueda made his first public remarks, stating he still intends to raise interest rates when conditions permit. Governor Ueda said on Wednesday, "If our projections materialize, we will proceed with raising interest rates and adjust the degree of monetary easing based on improvements in the economy and inflation." Ueda's comments indicate that, despite increasing market speculation about an early election and resulting financial market volatility, the Bank of Japan has not altered its rate hike path thus far. In fact, Ueda's Wednesday remarks closely mirrored his statements from the previous week, made before discussions of an early election emerged. Most economists anticipate the BOJ will keep rates unchanged at its January 23 policy meeting, with many predicting the next hike could occur around June. According to local media reports, Sanae Takaichi is expected to dissolve the House of Representatives next week, a move signaling her intention to call a snap election. This would be the first nationwide election she oversees since becoming Prime Minister last October. This week, influenced by expectations that Takaichi might use a fresh mandate to implement more expansionary fiscal measures, Japanese stock markets rose, while bonds and the yen weakened. The yen fell to its lowest level since July 2024, a period when Japanese fiscal authorities intervened to support the currency. On Wednesday afternoon in Tokyo, the yen traded around 159.20 per US dollar. A weaker yen increases import costs, adding to inflationary pressures. This dynamic could complicate Governor Ueda's goal of achieving stable price growth, coming after key price indicators have remained at or above the BOJ's 2% target for three and a half consecutive years. Ueda stated, "Wages and inflation are likely to continue rising gradually. Adjusting the degree of monetary easing appropriately will help us achieve our price target smoothly and support sustainable economic growth over the long term." Governor Ueda expressed that the Japanese economy is still expected to see a moderate recovery in 2025. Last month, the Bank of Japan raised its benchmark interest rate to 0.75%, the highest level since 1995. While BOJ watchers generally expect subsequent hikes to occur approximately every six months, some believe yen weakness could accelerate the timing of the next rate increase.
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