Report: The Bank of Japan is highly likely to raise interest rates by 50 basis points in December and suggests there is still room for future increases

On Friday, according to media reports citing informed sources, officials from the Bank of Japan are preparing to raise interest rates at a policy meeting later this month, provided that the economy or financial markets do not experience significant shocks during this period. This would bring Japan's policy interest rate to its highest level since 1995, while the central bank will indicate that there is still room for further rate hikes in the future.

Informed sources stated that officials expect it is highly likely that the benchmark rate will be raised by 0.25 percentage points to 0.75% at the conclusion of the two-day meeting on December 19. The central bank will indicate that it will continue to raise rates if its economic expectations are realized, but will remain cautious about how high rates will ultimately go.

Kazuo Ueda stated in a speech on Monday that the policy committee will make an appropriate decision regarding raising rates, similar to the signals he sent before the rate hike in January this year. Informed sources noted that Bank of Japan officials are aware of how the market will interpret these remarks, and overnight swap indices show that traders believe there is about a 90% chance of a rate hike this month.

Following the news, the dollar fell against the yen briefly, and Japanese government bond futures dipped slightly. Key government members in Japan stated earlier this week that if the Bank of Japan decides to raise rates in December, the government will not obstruct it.

Kazuo Ueda Sends Clear Signals, Economic Conditions Support Rate Hike

Market participants' expectations for an upcoming rate hike significantly increased this week, primarily due to the clear signals released in Kazuo Ueda's speech on Monday. The central bank governor stated that the policy committee will make an appropriate decision regarding raising rates, with wording highly similar to the signals he sent before the rate hike in January this year.

Informed sources indicated that Bank of Japan officials are aware of how the market will interpret these remarks, suggesting that investors have made the correct judgment. This deliberate communication strategy indicates that the central bank is laying the groundwork for policy adjustments. Overnight swap indices show that traders believe there is about a 90% chance of a rate hike this month.

According to informed sources, as the impact of U.S. tariffs becomes clearer and corporate profits continue to grow, providing room for wage increases, officials assess that the likelihood of economic expectations being realized has increased. These factors provide fundamental support for the rate hike decision.

However, informed sources stated that the central bank will continue to analyze the latest data and information until the last moment before making a final policy decision. This indicates that although the likelihood of a rate hike is high, there remains a degree of flexibility.

Adjustment Rather Than Tightening

Informed sources indicated that given that real interest rates remain below zero, the financial environment will continue to support the economy, and officials view the rate hike as an adjustment to the degree of policy easing rather than tightening. This wording leaves room for continued rate hikes.

Informed sources revealed that the Bank of Japan may indicate the need to examine the economy's response to each rate hike to determine the appropriate level of borrowing costs. When interest rates are at a neutral level, they neither stimulate nor cool the economy. The Bank of Japan estimates the neutral rate range to be between 1% and 2.5%, meaning that even if rates are raised to 0.75%, the policy rate is still significantly below the neutral level.

The focus of the market is on how strongly the Bank of Japan will hint at further rate hikes in the future. Informed sources stated that the central bank will suggest that it will continue to raise rates if economic expectations are realized, but will remain cautious about how high rates will ultimately go. **