The central banks are "taking turns to hit the market": after the Fed, now it's the Bank of Japan! Will Japan raise interest rates in December?

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After the Federal Reserve’s contradictory policy communications stirred the markets, the Bank of Japan picked up the “baton.” Kazuo Ueda’s remarks suddenly heightened market expectations for a rate hike by the BOJ in December.

On December 1, BOJ Governor Kazuo Ueda, in a rare move, directly mentioned the upcoming December 18-19 monetary policy meeting in a speech, saying a decision would be made “as appropriate” at that time. Investment banks viewed this as a strong signal, significantly raising the possibility of a rate hike this month.

The market reaction was swift: Pricing for a December rate hike by the BOJ jumped from 20% ten days earlier to 80%. Previously, the Fed’s communication confusion had once lowered the probability of a December rate cut from 80% to 30%, only to later rise back to 100%.

Japanese government bond yields surged across the board to recent highs, and the narrowing US-Japan interest rate spread led the dollar-yen exchange rate to fall. Meanwhile, as a bellwether for “carry trades,” the price of bitcoin in a matter of hours erased almost all of the gains accumulated over the past ten days. The market fears that, with year-end liquidity drying up, a surprise BOJ rate hike just before Christmas could spark turmoil similar to December 2022, repeating a “carry trade massacre.”

Now, Wall Street is clearly divided over the BOJ’s path in December. According to Chase Wind Trading Desk, Morgan Stanley said in a recent report that a December rate hike has become its “base case” scenario, given the unusual nature of Ueda’s speech and reduced US economic uncertainty. Goldman Sachs remains cautious, saying the BOJ may still need more corporate wage data, and that action in January next year remains most likely.

Kazuo Ueda’s “Rare” Statement

The immediate catalyst for the market shift was Ueda’s speech in Nagoya while meeting with business leaders. According to Morgan Stanley, it is “highly unusual” for a BOJ governor in a regular speech to directly mention the next specific meeting and hint at a coming decision.

Ueda specifically said: “Ahead of the next monetary policy meeting on December 18 and 19, the BOJ is actively gathering information from headquarters and branches on corporate stances towards wage hikes... At that time we will review and discuss domestic and overseas economic activity, prices, and financial markets, and weigh the pros and cons of a rate hike, making a decision as appropriate.”

Morgan Stanley believed this wording put the December meeting under the policy spotlight, greatly increasing the likelihood of a rate hike that month, and made it the “base case” for their forecast. Previously, they had seen a December hike as a risk scenario, but after the October meeting shifted it to the most probable baseline forecast.

Moreover, Ueda’s assessment of external conditions was more optimistic. He pointed out that uncertainty around the US economy has decreased, especially as the risk of a federal government shutdown and tariff policy uncertainties have lessened. While US tariffs on Japan had been a major concern, for now the direct impact on Japanese corporate profits appears limited, and overall US downside risks have eased.

Positive Signals For a Rate Hike

Ueda’s speech not only sent signals in its tone, but also provided multiple arguments for a hike. He said confidence in achieving his economic outlook “is gradually strengthening,” and the conditions for normalizing policy are improving.

First, regarding wage growth—the most important precondition for a hike—Ueda judged that the “initial momentum” for next spring’s wage negotiations is improving. He cited several positive factors: the Japanese Trade Union Confederation maintaining a 5% or higher wage increase goal; the Japan Business Federation upgrading their wage stance from last year’s “anchored” to “further anchored”; and company surveys showing many firms planning to maintain or exceed this year’s wage increase.

Second, Ueda was optimistic about recent data. He believes the negative real GDP in the third quarter of 2025 is only “temporary,” representing a technical pullback from front-loaded exports. Excluding volatility, the economy is still steadily recovering. At the same time, US economic uncertainty has diminished, and downside risks for Japan’s economy have eased.

Finally, on inflation, Ueda stated that the pass-through from wages to sales prices continues, and the shape of rising prices “is starting to resemble the early 1990s,” when Japan’s annual average inflation rate was about 2%. This suggests that the underlying inflation trend may be undergoing a lasting shift.

Rate Hike in December? Wall Street is Divided

Morgan Stanley explicitly stated its long-standing “non-consensus” prediction—i.e., a December hike—is re-emerging as market consensus. They noted that due to OIS market pricing dipping below 20% earlier, many economists postponed forecasts to January or even October next year.

However, with the yen’s continuing depreciation and a series of political and regulatory dynamics—including a November 18 meeting between Prime Minister Sanae Takaichi and Ueda, and hawkish remarks from Policy Board members Koeda and Masu—the market climate has shifted.

Morgan Stanley believes if there are no major surprises or significant increases in uncertainty before the December meeting, the likelihood of a BOJ rate hike this month is very high. The next Tankan survey (to be released December 15) is expected to further confirm employment and corporate profit conditions, providing data for the policy meeting three days later.

In contrast, Goldman Sachs remains cautious on action in December. According to economist Akira Otani’s report, while Ueda’s remarks went “further” than those made after the October meeting, a December rate hike is not a done deal.

The core of Goldman’s logic lies in data availability. The report notes that Japanese large-company management usually sets wage policies in year-end to early-next-year “shunto” (spring wage offensive) talks. Therefore, Goldman argues that by the December 18-19 meeting, the BOJ may not yet have sufficient wage data. By the January 2026 meeting, however, it will have more branch manager reports and survey results.

Goldman maintains its base case of a January 2026 hike, but admits that if the yen weakens further, or more companies announce wage hikes early to grab talent, the probability of a December hike will rise. Goldman notes that Ueda explicitly linked the timing of the next hike to information on “corporate wage-setting stance,” and that the BOJ will act after getting more concrete data.

Carry Trade Risks Resurface

Market fears about a December hike stem not just from interest rates themselves, but also from timing.

Current market conditions show a major disconnect between central bank communications and market expectations. According to analysts, the Fed’s earlier communication chaos left the market bewildered, and the BOJ’s sudden hike odds—jumping from 20% to over 80% in just ten days—have further heightened market fragility.

(Path of the probability of a Fed rate cut)

This brings back painful year-end memories for global traders. In December 2022, the BOJ also surprised the market by tweaking its yield curve control (YCC) policy at the December meeting, raising the 10-year government bond yield cap from 0.25% to 0.5%—causing major global market turmoil.

Deutsche Bank’s Jim Reid reminds us that history can repeat itself in striking ways. Market pressures have already begun to appear: with US-Japan rate moves, crypto assets like bitcoin rapidly plunged, seen as an early sign of forced carry-trade unwinding. With December 19 landing just before the Christmas holidays, annual liquidity is at a low; any surprise tightening may be magnified in such thin conditions, risking another “carry trade debacle.”

Risk Warning and DisclaimerThe market carries risks, and investments should be made with caution. This article does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation, or needs of any individual user. Users should consider whether any views, opinions, or conclusions contained herein are appropriate to their specific situation. Investment based on this is at your own risk. ```