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- The BOJ’s commentary is becoming increasingly hawkish in response to the yen’s weakness and persistent inflation.
- Prime Minister Takaichi and Finance Minister Katayama are showing no objection towards tightening, easing the pressure off the BOJ to hike, while new measures are expected to help reduce inflation on households.
The Bank of Japan might be signaling a possible rate hike in its December meeting, bringing back a hawkish tone after renewed concerns over a weakening yen. Recent signals highlight inflation risks, which kept the rate hike expectations in play.
The recent moves follow a meeting between Japan’s Prime Minister Sanae Takaichi and BOJ Governor Kazuo Ueda, mainly focused on how monetary policy should move forward. Whether the BOJ acts in December or waits until January might also depend on the US Fed’s decision in December.
Recent comments from BOJ officials suggest the weak yen is becoming a persistent trend that could cause inflation to rise further, prompting the central bank to prepare markets for potential tightening.
Hawkish Voices Strengthen
Hawkish opinions are growing among BOJ officials. One stated that the BOJ must keep hiking rates as inflation remained persistently high. Kazuyuki Masu mentioned that the timing of a rate hike was near. That comment sent Japanese government bonds to 17-year highs on Wednesday. ⁽¹⁾
Despite his dovish stance, Governor Ueda told the Japanese parliament that the BOJ would discuss the timing of a rate hike in the upcoming meetings, a shift from earlier comments that indicated no timeline on rate hikes. A weak yen affecting underlying inflation has become a key factor influencing the BOJ’s decision.
Ueda also told the parliament that the BOJ must carefully monitor the impact of a weak yen on underlying inflation. Japan’s headline inflation rose to 3%, marking more than three and a half years above the BOJ’s 2% target. ⁽²⁾
A Growing Push Toward Normalization
The Bank of Japan has kept rates steady since it raised rates to 0.5% back in January due to concerns over US tariffs and their impact on the Japanese economy. The slow pace of rate hikes has already contributed to weakness in the yen, which has accelerated inflation through higher import costs.
However, the BOJ isn’t looking for any more reasons to delay rate hikes, as the impact of US tariffs has been minimal and early signs from next year’s wage talks suggest solid pay hikes. Renewed yen declines have strengthened the case for a near-term hike. ⁽³⁾
Finance Minister Satsuki Katayama recently said she isn’t objecting to the BOJ’s rate-hike path. After meeting with Takaichi, Governor Ueda said that the prime minister appeared to acknowledge the BOJ’s plan to gradually raise rates toward its 2% inflation target. ⁽⁴⁾
Rising Expectations for a Hike
Prime Minister Takaichi announced her first economic package to ease cost-of-living pressures. Given her priority of helping households manage inflation, it could allow the BOJ to proceed with a rate hike.
Finance Minister Katayama also reiterated her warnings to speculators about a possible intervention in the FX markets in order to stabilize the yen. The yen has declined more than 6% since September and has reached a 10-month low, driven by higher import costs that have fueled inflation. ⁽⁵⁾
External Factors: Fed Influence and Market Sensitivity
The US Federal Reserve’s upcoming meeting in December also adds uncertainty. The Fed is at a crossroads in determining its next decision on monetary policy. Regardless, markets are pricing in an 85% chance of a 25-basis-point rate cut. ⁽⁶⁾
If the Fed surprises markets by holding steady on inflation worries or talks down future cuts, the US dollar could rise while weakening the yen further, adding more pressure on the BOJ to hike next month.
Conversely, a Fed rate cut could support the yen and take pressure off the BOJ for an immediate response. But it would also raise questions about US economic health and future BOJ hikes.
Still, the latest hawkish BOJ signals are enough to remind markets of the dangers of assuming the bank will keep interest rates low for long. Markets currently price in about a 40% chance of a December hike and about a 90% chance by January. ⁽⁷⁾
