Analysis-BOJ locks in near-term rate hike, yen may sway timing

Written by Laika Kihara

TOKYO (Reuters) – A cautious Bank of Japan governor has dropped unusually hawkish hints about raising interest rates in December or January next year, with the timing likely to be affected not only by wage momentum but by yen moves.

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

While the council warned of continued global uncertainty, it revised its growth forecast for this year and made few adjustments to its upbeat view on Japan’s recovery prospects in a quarterly report issued after the meeting.

As was the case before the Bank of Japan’s previous rate hike in January, Ueda also explained business drivers with an eye on the “initial momentum” for next year’s wage negotiations.

“Ueda’s comments…contain many signals that unless there are major shocks to the US economy or US markets, the probability of raising interest rates in the near term is rising,” said Takeshi Yamaguchi, chief Japanese economist at Morgan Stanley MUFJ Securities.

“Given Ueda’s use of the term ‘initial momentum’, we think it is unlikely that the BOJ will wait until the March wage results,” said Yamaguchi, who expects a rate hike in December.

More data to come

More data will be available by the Bank of Japan’s next policy meeting on December 18-19 that should provide hints for next year’s wage outlook, including corporate earnings reports and the central bank’s “tankan” business survey scheduled for December 15.

Already, Japan’s largest union group has said it will seek a wage increase of 5% or more in 2026, aiming to significantly increase wages for a fourth straight year despite external headwinds.

There may also be early hints about how automakers set wages, a sector to which Ueda said he was paying particular attention, as they face the hit from US tariffs. Last year, labor unions at major automakers set targets for wage increases in December.

Ueda may also respond to mounting pressure from within his nine-member board to act sooner rather than later. Two board members reiterated their proposal, made in September, to raise interest rates to 0.75%, on Thursday.

Recently, US Treasury Secretary Scott Bessent weighed in, urging the government of new Prime Minister Sanae Takaishi, known as an advocate of easy monetary policy, to allow the Bank of Japan to raise interest rates and avoid an excessive decline in the yen.

“A hawkish bloc has strengthened within the Bank of Japan’s policy board” with an “external defender pushing for tighter monetary policy” at Besent, said Frederic Neumann, chief Asia economist at HSBC, who expects a rate hike in December.

“As a new prime minister, it may be beneficial for Takaishi to stay away from raising interest rates early in her term,” he added.

Yen complicates timing

The Bank of Japan may certainly choose to play it safe by waiting until its meeting on January 22-23, when most major manufacturers confirm pay plans at the beginning of the year, some analysts say.

By then, there will be more clarity on the Takaishi administration’s budget plans and economic policies. The Bank of Japan could also provide a more comprehensive analysis to justify the rate hike in a quarterly report due after the January meeting.

Ultimately, however, the timing may depend a lot on the yen’s movements, as a renewed decline in the currency would lead to higher import costs and broader inflation, some analysts say.

The yen fell to its lowest level in nearly nine months against the dollar on Thursday despite Ueda’s hawkish comments. Core consumer inflation in the Japanese capital, a leading indicator of nationwide trends, rose in October and remained above the central bank’s 2% target, data showed on Friday.

A further rise in the cost of living would contradict Takaishi’s pledge to ease the blow of inflation on households.

Akira Otani, former executive director of the Bank of Japan, expects the Bank of Japan to raise interest rates in January, when there is enough data on whether companies will overcome the tariffs and continue to raise wages. But it indicates that the yen is likely to change timing.

“At present, we do not see a strong chance of an interest rate increase in December,” said Otani, current managing director at Goldman Sachs Japan. “But the possibility may increase if the yen’s decline accelerates and the risk of inflation exceeding the Bank of Japan’s core forecast announced in October increases.”

(Reporting by Leika Kihara; Editing by Kim Coghill)