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Our long-standing forecast for the Bank of Japan to raise rates at the December 19 meeting is likely to materialize. BOJ Governor Ueda has recently signaled such a move, explicitly stating that the BOJ will weigh the “pros and cons” of raising rates to 0.75% at the upcoming meeting. The government has shown tolerance for further tightening, with the Prime Minister, Finance Minister, and Economic Minister emphasizing that specific monetary policy decisions are for the BOJ to determine.
Attention will focus on the BOJ’s guidance regarding the pace of subsequent hikes and the potential terminal policy rate. Governor Ueda is expected to maintain a cautious stance, highlighting that the timing of future hikes will remain data-dependent and that the neutral rate is at least around 1%. Sustained wage-driven inflation is not yet guaranteed: labor unions are demanding strong wage increases to offset inflation, but firms face limited capacity amid a tariff environment squeezing corporate profits. On the neutral rate, Ueda has noted in parliamentary hearings that it can only be estimated within a wide range (1%-2.5%) due to the underlying natural rate being unobservable and sensitive to multiple economic factors.
Rates outlook: Historical experience in 2024–2025 suggests the BOJ is likely to raise rates only once every six to twelve months. In our view, the earliest plausible timing for the next hike would be 2Q26, once spring wage negotiation results are clear, with a more cautious estimate pointing to 2H26. Given current wage momentum and underlying inflation, we assess the near-term neutral rate at 1%-1.5%.
JPY outlook: The swap market currently prices in a 90% probability of a 25bps hike next week. Market expectations suggest the BOJ policy rate could reach ~1% by end-2026, ~1.5% by end-2027/28, and ~1.75% by end-2030. Without clear hawkish forward guidance, the upcoming hike is unlikely to trigger a sharp JPY appreciation. Unlike the July 2024 hike, the BOJ has engaged in substantial pre-communication, and speculative JPY shorts have largely been unwound. As a result, the December hike is unlikely to spark significant carry trade unwinding or a broader global risk asset sell-off.
Ma Tieying 馬鐵英, CFA
Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
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