Minutes from the Bank of Japan's December meeting stated that "real interest rates remain very low," hinting at further rate hikes.

The minutes of the Bank of Japan's December policy meeting show that several members believe the country's real interest rates remain at extremely low levels, suggesting that rate hikes will continue in the future. This signals new clues for the market to assess the normalization path of Japanese monetary policy.

According to Bloomberg's report on Monday, at the meeting that ended on December 19, one member explicitly stated that "Japan's real policy rate is far below global levels" and said that "it is appropriate for the central bank to adjust the degree of monetary easing," citing reasons such as the impact of exchange rate fluctuations on prices. The meeting raised the benchmark interest rate to 0.75%, a 30-year high.

The minutes also reveal that one member suggested the central bank should adjust policy at intervals of "several months" for a period of time, which is in line with market expectations. According to a Bloomberg survey, economists expect the Bank of Japan to raise rates again in about six months, with most believing that the terminal rate for this tightening cycle will be 1.25%.

Former Bank of Japan Executive Director Hideo Hayakawa said earlier this month that the central bank may raise rates to 1.50% by early 2027.

A "considerable distance" from the neutral rate remains

The minutes clearly show that the Bank of Japan's policy rate has not yet reached neutral levels. One member remarked that it can be said there is still a considerable distance from the neutral rate level.

At the press conference following the December 19 decision, BOJ Governor Kazuo Ueda stated that it is difficult to precisely determine the neutral interest rate level—the balance point where policy neither stimulates nor restricts the economy. A BoJ study indicates the neutral rate lies within a broad range of 1% to 2.5%.

The minutes show that some members echoed Ueda's view on the neutral rate, noting its difficulty to pinpoint. One member said the central bank should interpret the neutral rate with considerable flexibility, while another thought it should not target a specific level and should remain flexible in its approach.

Concerns over yen depreciation have eased

The minutes indicate that some members were concerned about the yen's decline, which may have been one factor behind the December 19 rate hike. However, the yen was mentioned only once in this meeting's discussion, compared to seven times in January's previous rate hike meeting.

Before this month's meeting, the yen had already fallen to its weakest level in about ten months, nearing the 160 mark against the dollar—a level which previously triggered intervention by Japanese authorities. Although monetary policy actions by the Bank of Japan and the Federal Reserve have narrowed the US-Japan rate differential, the yen remains weak, prompting stronger verbal warnings from authorities to curb excessive market volatility.

The market had largely priced in rate hike expectations before this month's meeting, after Kazuo Ueda signaled before the decision that conditions for scaling back monetary easing were coming into place.

Risk Warning and DisclaimerThe market involves risks, and investment should be cautious. This article does not constitute personal investment advice, nor does it take into account individual users' specific investment objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investments made based on this are at one's own risk.