The yen continues to fall; is a rate hike by the Bank of Japan imminent in December?

After the yen continued to depreciate and fell to a ten-month low, Junko Koeda, a member of the Bank of Japan's Policy Board, said the central bank needs to advance normalization, hinting that a rate hike could come as soon as next month.

On Thursday, speaking to business leaders in Niigata, Junko Koeda made it clear:

“Given that real interest rates are currently at very low levels, I believe the central bank needs to move forward with normalizing rates.”

This was her first speech since joining the Policy Board in March, and her hawkish stance is seen as a signal that broader support may emerge within the Bank of Japan.

However, the market’s response was quite subtle. After Junko Koeda’s remarks, the yen briefly fell against the dollar before recovering some ground, trading near 157. This suggests investors may be expecting a stronger commitment to rate hikes. Meanwhile, Japan’s Chief Cabinet Secretary Minoru Kihara expressed concern over recent "one-sided and sudden" exchange rate fluctuations, emphasizing the importance of stable rates that reflect fundamentals.

These developments have investors closely watching the Bank of Japan’s policy meeting on December 18 and 19. According to a Reuters survey of 81 economists, 43 (53%) expect the bank to raise rates by 25 basis points to 0.75% at this meeting. Policymakers are trying to balance curbing imported inflation with supporting economic growth, and the yen’s movement appears to have become a key variable influencing decisions.

Japanese Government Highly Vigilant, Yen Depreciation Raises Concerns

The rapid depreciation of the yen has raised high vigilance in the Japanese government. Chief Cabinet Secretary Minoru Kihara said at a press conference on Thursday that he is concerned about the recent one-sided and sudden movements in the forex market and emphasized maintaining a highly vigilant attitude.

The yen has fallen below 157 against the dollar, the weakest level since January of this year. Against the euro, the yen has hit historic lows. The currency’s weakness is partly attributed to the market’s diminished expectations for imminent rate cuts by the U.S. Federal Reserve.

Despite frequent “verbal intervention” from government officials, no specific countermeasures have been revealed. Finance Minister Katsuyuki Katayama said Wednesday evening that she had confirmed with BOJ Governor Kazuo Ueda the need to monitor market trends, but did not discuss the yen as a specific topic. This suggests the authorities may prefer to watch the BOJ’s policy moves before directly intervening in the currency market.

Hawkish Voices Emerge, Reasons for Rate Hikes Mount

The case for action by the Bank of Japan is increasingly strong. In her speech, Junko Koeda pointed out that Japan’s recent economic indicators are generally solid and that the underlying inflation rate is about 2%, meaning the bank’s price target has been largely achieved. She believes that under these conditions, the central bank needs to continue raising policy rates in line with improvements in economic activity and prices.

According to Bloomberg, in the October policy meeting, two Policy Board members already called for a rate hike, and Koeda’s latest statement may reinforce the view that there is now broader consensus on the necessity of a hike among the nine-member board. Economists also note that the yen’s sharp depreciation is pushing up inflationary pressure via import prices. Norinchukin Research Institute Chief Economist Takeshi Minami said the central bank is likely to raise rates earlier than expected, framing it as a “fine-tune” of the degree of monetary easing.

Although Japan’s third-quarter GDP shrank at an annualized rate of 1.8%, the first negative growth in six quarters, economists generally believe this was mainly due to one-off factors such as regulatory changes in the construction sector, and the underlying economic trend is not so weak.

Market Expectations Diverge, Uncertainty Remains

Despite growing calls for a rate hike, the policy outlook is far from straightforward. Overnight swap market data shows that bets on a hike next month are actually decreasing. This echoes the yen’s weakness after Koeda’s speech, reflecting that market confidence in immediate action by the central bank is not robust.

There are also uncertainties at the policy level. Newly appointed Prime Minister Sanae Takaichi is known for advocating expansionary fiscal and monetary policies and has urged the central bank to proceed cautiously with rate hikes. Her economic group member and former BOJ Policy Board member Goushi Kataoka said in an interview this week that the earliest timing for a rate hike may be March next year.

Wage growth is a key factor repeatedly emphasized by BOJ Governor Kazuo Ueda for a rate hike. The Reuters survey shows 81% of economists believe next year’s wage increase will not exceed this year’s 5.25%, which may provide one reason for the bank to delay action.

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