With the Bank of Japan's December monetary policy meeting approaching, markets have priced in a roughly 90% probability of a rate hike to 0.75%. Nomura Securities believes a December hike is nearly certain, with attention now turning to how Governor Kazuo Ueda will communicate the future rate path—particularly regarding terminal rate levels and the pace of further hikes.
According to trading desk reports on December 11, Nomura noted in its latest research that with no economic outlook report scheduled for December, Ueda’s remarks on neutral rates and hints about future rate hikes will be the market’s key focus. The firm expects Ueda to emphasize that "real rates remain very low," signaling no dovish pivot toward ending hikes. On neutral rates, Ueda may keep his language vague to maintain policy flexibility. Nomura highlighted that if the BOJ removes phrasing about raising rates "based on improvements in economic and price developments," it would suggest reduced hurdles for additional hikes.
A recent survey shows 90% of economists predict the BOJ will hike by 25 basis points at its December 18-19 meeting, with markets fully pricing in an aggressive path—rates reaching 1.0% by September 2026 and terminal rate expectations as high as 1.5%. However, Nomura argues that even accounting for expanded fiscal stimulus and recent yen depreciation, the meeting is unlikely to signal a more hawkish pace or higher terminal rate than already priced. The firm maintains its call for rates to hit 1.0% in January 2027, later than the market’s September 2026 projection.
**December Hike a Done Deal** Nomura explicitly states the BOJ will raise rates from 0.50% to 0.75% in December, citing Ueda’s December 1 speech where he said the central bank was "laying the groundwork for a December hike." Key reasons include: 1. **Wage negotiations**: The BOJ has preliminary insights into 2026 wage talks. 2. **Currency-inflation passthrough**: Ueda expressed clear concern about yen weakness potentially affecting underlying inflation. The yen’s drop past 157/USD on November 20 likely alarmed policymakers.
Political shifts also support tightening. Reports suggest former fiscal hawk Sanae Takaichi, worried about excessive yen depreciation, may be moderating her stance. Takaichi now appears open to hikes, with voices advocating aggressive fiscal expansion becoming a minority. Notably, no major tax-cut proposals emerged in 2026 fiscal reform discussions, and officials say Takaichi has dialed back ambitious initial budget demands.
Given markets price a 90% hike chance, Nomura sees no suspense unless financial turbulence forces a last-minute pause.
**Policy Communication as the Key Variable** With a December hike all but certain, the real focus is how Ueda manages expectations post-decision. Nomura expects signals on two fronts: 1. **Qualitative**: Ueda may reiterate that "real rates remain very low" or "still far below neutral," ruling out near-term hike cessation. 2. **Quantitative**: The BOJ’s 2024 neutral rate range (-1% to +0.5%) implies a nominal neutral rate of 1%-2.5% if inflation stabilizes at 2%. Ueda may comment but stay vague to retain flexibility.
Nomura notes media and institutional views suggest rising neutral rate estimates, with the BOJ potentially lifting its 1.0% floor. On terminal rates, markets appear overly aggressive—the "2-year-1-year forward" rate at 1.49% and 2026 OIS at 0.9875% imply full pricing for 1.0% by September 2026. Nomura’s team sees this as excessive, expecting neither inflation nor growth to materially overshoot by then.
Regarding future hikes, Nomura predicts the BOJ will decouple tightening from specific events like "shunto" wage talks, instead stressing data dependence. The firm stands by its January 2027 call for 1.0% rates, contrary to market pricing, suggesting over-anticipation of hikes.
Investors should watch whether the BOJ drops its May-added caveat about hiking "based on economic/price improvements." Removal would signal lower barriers to further tightening.
Comments