Bank of Japan Set to Raise Interest Rates for First Time Since 2025

The Bank of Japan (BOJ) is poised to raise its policy interest rate from 0.5% to 0.75% at its upcoming meeting on December 18-19, marking the first increase since January 2025. Governor Kazuo Ueda indicated that the decision will hinge on economic indicators, including domestic wage data and the U.S. Federal Reserve's forthcoming actions.

In a speech to business leaders in Nagoya on December 1, Ueda stated, "The bank will consider the pros and cons of raising the policy interest rate and make decisions as appropriate." He emphasized that any hike would be an adjustment in the degree of easing, with real interest rates remaining at very low levels.

The Japanese government, under Prime Minister Sanae Takaichi, is expected to support this move despite its traditionally dovish stance. Finance Minister Satsuki Katayama affirmed, "There is no policy disagreement between the BOJ and the government." Even reflationist advisors close to the prime minister have not voiced opposition, conditioned on persistent yen weakness.

Market reactions have been notable, with the 10-year Japanese government bond yield reaching an 18-year high of 1.93%. The anticipation of a December hike has influenced markets, reflecting investor expectations of a shift in monetary policy.

Governor Ueda highlighted the challenges in determining how much interest rates can be raised due to uncertainty around the country's neutral interest rate—the rate that neither accelerates nor slows economic growth. The BOJ currently estimates the nominal neutral rate to be between 1% and 2.5%, while the current short-term policy rate is set at 0.5%. Ueda noted that the BOJ plans to continue refining its estimates and may disclose more precise figures in the future.

The potential rate hike carries several social and economic implications:

• Household Borrowing Costs: An increase in interest rates could lead to higher borrowing costs for households, affecting mortgages and personal loans.

• Corporate Financing: Businesses may face higher costs for financing, potentially impacting investment decisions and expansion plans.

• Currency Valuation: A rate hike might strengthen the yen, affecting Japan's export competitiveness.

• Inflation Control: Adjusting interest rates is a tool to manage inflation, aiming to prevent the economy from overheating.

As the BOJ approaches its December meeting, the potential rate hike reflects a cautious yet deliberate move towards policy normalization. The decision will hinge on forthcoming economic data and global monetary trends, with further clarity expected during Governor Ueda's post-decision news conference in mid-December.