Recently, informed sources have been intensively releasing signals: there is a strong consensus that the Bank of Japan will raise interest rates this month, and if the economy and financial markets are not significantly impacted, the Japanese policy rate will reach its highest level since 1995 after the December policy meeting.
Interest rate adjustment: 25 basis points raised to 0.75%, with further tightening likely.
According to reports, the Bank of Japan plans to raise interest rates by 25 basis points at the two-day policy meeting ending on December 19, pushing the benchmark rate to 0.75%—the highest policy rate in Japan in 30 years.
The premise of this interest rate hike is that "the economy and financial markets are not significantly impacted during the period"; if the economic outlook meets expectations, the central bank will also hint at further interest rate hikes, but will maintain a cautious attitude towards the extent of the final rate increase.
Policy support: Government tacit approval + improving economic fundamentals.
Market expectations for interest rate hikes have surged sharply this week, stemming from comments by Bank of Japan Governor Ueda Kazuo—who stated that the policy committee will 'make appropriate decisions regarding interest rate hikes,' a signal that is highly similar to statements made before the first interest rate hike in January this year.
At the same time, the policy level has also gained government support: informed sources point out that if the central bank raises interest rates in December, key members of the Kishi administration will not obstruct it.
Economic fundamentals also provide the basis for an interest rate hike: the impact of U.S. tariffs is gradually becoming clear, coupled with high corporate profits providing space for wage increases, the central bank's confidence in achieving its economic outlook has increased. However, the central bank also emphasizes that it will continue to screen the latest data and will make the final decision only at the last moment.
Policy positioning: easing adjustment rather than tightening, with a relatively broad neutral interest rate range.
It is worth noting that the Bank of Japan has defined this interest rate hike as an 'adjustment of monetary easing policy' rather than tightening—because the current real interest rate is still below zero, and the financial environment still supports the economy.
Regarding the long-term target for the policy rate, the Bank of Japan has a broad estimated range for the 'neutral interest rate' (the interest rate level that neither stimulates nor suppresses the economy), between 1% and 2.5%, with the pace of subsequent rate hikes depending on the economy's response to the policy.
Market reaction: Interest rate hike probability expectation reaches 90%, yen exchange rate has risen.
Overnight index swap data shows that traders believe the probability of the Bank of Japan raising interest rates this month is about 90%. Following the news, the yen has already appreciated against the dollar, and the market's current response is relatively mild, but as the 'possibility of continuous rate hikes' is gradually digested, the yen's gains may further expand during global trading hours.
Bloomberg strategists point out that the current tacit period of the government may become a 'narrow window' for the Bank of Japan to move towards a neutral interest rate, which will also become a favorable factor for the yen to strengthen.
