Bank of Japan prepares rate hike: possible move in December

After months of caution, the BOJ board is considering raising the key rate to 0.75%, the highest level since 1995. Markets are on edge as the yen strengthens.

The Bank of Japan is moving closer to a potential shift in its ultra-loose monetary policy. According to several sources familiar with the matter, officials see a high likelihood of raising interest rates at the December 19 meeting, unless the economy or financial markets face unexpected shocks in the coming weeks. The option under consideration is a 25-basis-point increase, which would bring the benchmark rate to 0.75%, the highest level in Japan since 1995.

Statements by Governor Kazuo Ueda have helped fuel investors’ expectations. In a recent speech, the head of the BOJ mentioned the need for an “appropriate decision,” language seen as similar to remarks he made just before a previous rate hike. Markets reacted immediately: the probability of a move already in December climbed to 90%, and the yen strengthened to 154.56 against the dollar.

The government led by Sanae Takaichi, despite its traditional inclination toward monetary easing, would not stand in the way of the decision. Certain macroeconomic indicators also seem to support a gradual return to normalization: corporate profits remain high, wage dynamics are showing encouraging signs, and the impact of U.S. tariffs is becoming clearer.

The BOJ, however, continues to proceed cautiously. The institution considers any potential increase as merely an adjustment rather than a genuine tightening, noting that real interest rates remain in negative territory. The “neutral rate,” the level at which policy neither stimulates nor cools the economy, is difficult to estimate and may lie between 1% and 2.5%.

The international backdrop adds another layer of uncertainty: the Federal Reserve, expected to meet next week, is likely to cut its rates, inevitably influencing movements in the yen. Shortly afterward, the Tankan survey—Japan’s main business sentiment indicator—will be released and could prove decisive in shaping the BOJ’s final stance.

After a summer contraction, Japan’s economy is showing signs of recovery, supported in part by the new and sizable fiscal package introduced by the Takaichi government. December may therefore mark a historic step in the country’s slow exit from the era of ultra-low interest rates.

Andrea Pelucchi