BOJ likely to hike rate this month

[TOKYO] Bank of Japan officials are ready to raise interest rates at a policy meeting later this month, provided there’s no major shock to the economy or financial markets in the meantime, according to people familiar with the matter.

The central bank will also indicate it will continue to raise rates if its economic outlook is realised while remaining cautious on how far they will eventually push rates up, the people said. 

The officials see a high likelihood of increasing the benchmark rate by a quarter percentage point to 0.75 per cent at the end of a two-day gathering on Dec 19, the people said. A rate hike would push the policy rate in Japan to its highest level since 1995. A key market focus is how aggressively the central bank will point to additional hikes. 

The yen strengthened against the dollar following the report, and was trading around 154.56 mid-afternoon in Tokyo from just above 155 before the news.

Expectations among market players of a looming rate hike jumped this week after governor Kazuo Ueda said his board would make an appropriate decision on raising interest rates in a speech on Monday. That’s similar to the message he gave in January ahead of a move to raise borrowing costs. 

BOJ officials were aware of how the remarks would be interpreted by the market, according to the people, an indication that investors have drawn the right conclusion. An index of overnight swaps shows that traders see about a 90 per cent chance of the move this month.

Key members of Prime Minister Sanae Takaichi’s government wouldn’t stand in the way of the BOJ if it decides to raise interest rates in December, people familiar with the matter told Bloomberg earlier this week. Takaichi is known as a supporter of monetary easing and BOJ watchers have cited her stance as key in influencing the BOJ’s rate path. 

With more clarity on the impact of US tariffs and elevated corporate profits continuing to give firms leeway to raise wages, the officials assess that the likelihood has risen for their economic outlook to be realised, the people said.  

Still, the bank will continue to sift through incoming data and information until the last minute before reaching a final policy decision, the people said. The Federal Reserve meets next week and is expected to cut its benchmark rate. Its decision combined with any signals over the outlook for US rates may influence markets and the yen.

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The following week, the BOJ will release its quarterly Tankan business survey, one of its most closely watched economic reports, just a few days before the policy meeting. 

Officials see a rate hike as an adjustment of monetary easing, not a tightening, given that financial conditions will remain supportive for the economy with the real interest rate still below zero, according to the people. That’s an indication that the interest rate hasn’t reached a neutral level where it neither stimulates nor cools the economy. 

The BOJ’s estimate for the neutral rate lies in a wide range between 1 per cent and 2.5 per cent. Officials believe it’s hard to pinpoint the level or narrow the range, according to the people.  

The central bank will therefore likely suggest the need to examine how the economy responds to each hike to determine how far to raise rates, according to the people. 

The BOJ has kept its rate unchanged since January as it has tried to assess whether underlying inflation will rise as expected even as the economy is hit by higher US tariffs. 

The economy shrank over the summer, but is expected to have returned to growth this quarter. Takaichi’s recent economic package, the biggest round of fresh spending measures since the easing of pandemic restrictions, will offer support for households and the economy over the coming months. BLOOMBERG