Analysis: BOJ sets short-term rate hike, yen could influence timing

By Leika Kihara

TOKYO (Reuters) – The Bank of Japan’s cautious governor has dropped unusually aggressive hints of an interest rate hike in December or January next year, with the timing likely to be influenced not only by the boost in wages but also by moves in the yen.

The central bank kept interest rates steady at 0.5% on Thursday as expected, but Governor Kazuo Ueda said the likelihood of his base case materializing has increased – language he had used in the past to signal that a rate hike was imminent.

While warning of lingering global uncertainties, the board revised upward this year’s growth forecast and made some adjustments to its optimistic view of Japan’s recovery prospects in a quarterly report released after the meeting.

As was the case before the BOJ’s previous rate hike in January, Ueda also explained the triggers for the action, emphasizing the “initial momentum” of next year’s wage negotiations.

“Ueda’s comments… contained many signs that, barring any major shocks to the U.S. economy or markets, the likelihood of a near-term rate hike is increasing,” said Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG Securities.

“Given Ueda’s use of the term ‘jump start’, we think the BOJ is unlikely to wait until the March wage results,” said Yamaguchi, who predicts a rate hike in December.

MORE DATA TO COME

More data will be available at the Bank of Japan’s next monetary policy meeting on Dec. 18-19 that would provide clues about next year’s wage outlook, including corporate earnings reports and the central bank’s “tankan” business survey to be released on Dec. 15.

Japan’s largest union group already said it would seek pay rises of 5% or more in 2026, aiming for bumper pay increases for a fourth straight year despite external headwinds.

There could also be early clues about how automakers – a sector Ueda said he was paying close attention to – are setting wages as they deal with the impact of U.S. tariffs. Last year, unions at major automakers set wage increase targets in December.

Ueda may also heed the growing pressure within his nine-member board of directors to act sooner rather than later. Two board members on Thursday repeated their proposal, made in September, to raise rates to 0.75%.

U.S. Treasury Secretary Scott Bessent recently weighed in, urging the government of new Prime Minister Sanae Takaichi, known as an advocate of loose monetary policy, to allow the Bank of Japan to raise rates and avoid excessive falls in the yen.

“A hardline bloc has solidified within the BOJ policy council” and the hawks have “an external advocate pushing for monetary tightening” in Bessent, said Frederic Neumann, HSBC’s chief Asia economist, who predicts a rate hike in December.

“As the new prime minister, it may even be to Takaichi’s advantage to eliminate the rate hike early in his term,” he added.

The yen complicates the moment

To be sure, the BOJ may choose to play it safe by waiting until its Jan. 22-23 meeting while most big manufacturers reaffirm their wage plans early in the year, some analysts say.

By then, there will be more clarity about the Takaichi administration’s budget plans and economic policies. The BOJ may also offer a more thorough analysis justifying a rate hike in a quarterly report due after the January meeting.

In the end, however, the timing may depend largely on the yen’s movements, as a further decline in the currency would raise import costs and widen inflation, some analysts say.

The yen fell to a near nine-month low against the dollar on Thursday despite Ueda’s hawkish comments. Data on Friday showed that core consumer inflation in Japan’s capital, a leading indicator of nationwide trends, recovered in October and remained above the central bank’s 2% target.

Further increases in the cost of living would run counter to Takaichi’s promise to cushion the blow of inflation to households.

Former Bank of Japan executive Akira Otani expects the Bank of Japan to raise rates in January, when enough data is available on whether companies will withstand the impact of tariffs and continue to raise wages. But he cites the yen could change the momentum.

“Right now, we don’t see a strong chance of a rate hike in December,” said Otani, currently managing director at Goldman Sachs Japan. “But the possibility could increase if the yen’s decline accelerates and the risk of inflation exceeding the BOJ’s October baseline forecast increases.”

(Reporting by Leika Kihara; Editing by Kim Coghill)