Report: The Bank of Japan is highly likely to raise interest rates by 50 basis points in December and has indicated there may still be room for further increases in the future.

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On Friday, according to media reports citing informed sources, Bank of Japan officials are preparing to raise interest rates at their policy meeting later this month, provided there are no major shocks to the economy or financial markets during this period. This would bring Japan’s policy rate to its highest level since 1995, while the central bank will hint that there is still room for further rate hikes in the future.

Sources said officials are very likely to raise the benchmark interest rate by 0.25 percentage points to 0.75% at the end of the two-day meeting on December 19. The central bank will make it clear that if its economic outlook is realized, it will continue to raise rates, but will be cautious about how high rates are ultimately pushed.

Kazuo Ueda said in a speech on Monday that the policy board will make an appropriate decision on raising interest rates, which is similar to the signals he gave before raising rates in January this year. Sources said Bank of Japan officials are well aware of how the market will interpret these remarks. Overnight swap indices show traders see about a 90% probability of a rate hike this month.

After the news was released, the US dollar fell against the yen in the short term and Japanese government bond futures declined slightly. Key Japanese government members earlier this week stated that if the Bank of Japan decides to raise interest rates in December, the government will not stand in the way.

Kazuo Ueda sends a clear signal, economic conditions support a rate hike

Market participants’ expectations for an imminent rate hike have surged this week, mainly because of the clear signals sent by Kazuo Ueda in his Monday speech. The central bank governor said the policy board would make an appropriate decision on raising interest rates, wording very similar to the signals he gave before the rate hike in January this year.

Sources said Bank of Japan officials are well aware of how the market will interpret these remarks, suggesting investors have made the correct judgment. This deliberate communication strategy shows the central bank is laying the groundwork for a policy adjustment. Overnight swap indices indicate traders see the probability of a rate hike this month at about 90%.

According to informed sources, as the impact of US tariffs becomes clearer and continued corporate profit growth provides more room for wage increases, officials now assess that the likelihood of the economic outlook being realized has increased. These factors provide a fundamental basis for the rate hike decision.

However, sources said the central bank will continue to analyze the latest data and information right up until the last moment before making a final policy decision. This indicates that although a rate hike is highly likely, there remains a certain degree of flexibility.

Adjustment, not tightening

Sources said that since real interest rates remain below zero and the financial environment will continue to support the economy, officials see a rate hike as an adjustment to the degree of policy easing rather than a tightening. This statement leaves room for further rate hikes.

Sources revealed that the Bank of Japan may state that it needs to observe how the economy responds to each rate hike in order to determine the appropriate level of borrowing costs. When rates are at a neutral level, they neither stimulate nor cool the economy. The Bank of Japan estimates the range of neutral rates at 1% to 2.5%, meaning that even if rates are raised to 0.75%, the policy rate remains far from neutral.

The focus of market attention is on how strongly the Bank of Japan will signal further rate hikes in the future. Sources said the central bank will indicate it will continue to raise rates if its economic outlook is realized, but will be cautious about how high rates will ultimately go.

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