By Leika Kihara TOKYO (Reuters) – The Bank of Japan is signaling to markets the possibility of an interest rate increase as early as next month, as sources indicate a revival of hawkish rhetoric in response to mounting concerns over the weak yen and waning political pressure to maintain low rates. Recent adjustments in the BOJ’s messaging have redirected attention from earlier anxieties about the U.S. economy to the inflationary threats posed by a depreciating yen, suggesting that a December rate hike remains a viable option, according to two individuals familiar with the bank’s strategies. This shift toward a more aggressive stance follows a significant meeting between Prime Minister Sanae Takaichi and BOJ Governor Kazuo Ueda last week, which seemingly mitigated immediate political resistance to rate hikes from the new administration. Nevertheless, the decision to either raise rates in December or delay until January hinges closely on the U.S. Federal Reserve’s upcoming rate announcement\u2014a week prior to the BOJ’s meeting\u2014which is anticipated to influence yen movements, as noted by one source. Furthermore, recent statements from various BOJ officials, including Ueda, reflect a growing consensus that the persistent weakness of the yen could contribute to higher inflation than previously expected. “The BOJ is clearly signaling its intention to avoid surprising markets should it choose to raise rates in December,” commented Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities. A Reuters survey indicated a narrow majority of economists foresee the BOJ implementing a rate hike at its next meeting on December 18-19, with all predicting an increase to 0.75% by March of next year. HAWKISH SENTIMENT GROWS An increasing number of board members believe the time is right for a rate hike. Junko Koeda remarked last week that the BOJ needs to continue raising real interest rates due to relatively strong prices. Kazuyuki Masu stated that the timing for a rate increase is “nearing” in an interview published on Saturday, pushing the 5-year government bond yield to a 17-year high on Tuesday. The insights from Koeda and Masu align them with two other board members who previously proposed, albeit unsuccessfully, raising rates to 0.75% from 0.5%. Even Ueda, previously perceived as the most dovish member, acknowledged in parliament on Friday the BOJ would evaluate the “feasibility and timing” of a rate hike in forthcoming meetings\u2014a notable shift from earlier indications of no predetermined timeline for policy changes. More critically, a weak yen could influence underlying inflation\u2014a crucial determinant for the BOJ’s rate decisions\u2014suggesting that the central bank is beginning to recognize the long-lasting effects of currency fluctuations on prices. DESIRE FOR POLICY NORMALIZATION After raising rates to 0.5% in January, the BOJ has maintained steady borrowing costs due to apprehensions about the economic impact of U.S. tariffs. This gradual approach to rate hikes has contributed to the yen’s weakness, which exacerbates inflation by inflating import costs. As Ueda’s justifications for maintaining low rates diminish, especially with the limited impact from U.S. tariffs, early indicators of next year’s wage negotiations are pointing toward more substantial salary increases, diminishing another avenue for Ueda\u2019s caution. Although the recent appointment of Takaichi, known for her dovish stance on fiscal and monetary policy, has complicated decisions, the renewed decline of the yen strengthens the case for a timely increase. With the yen plummeting to 10-month lows against the dollar, Finance Minister Satsuki Katayama expressed last week that she had “no particular objection” to the BOJ’s approach to rate hikes, indicating a shared vigilance between the government and the central bank regarding market dynamics. Following his meeting with Takaichi last week, Ueda conveyed that the Prime Minister appeared to understand the BOJ’s gradual plans to adjust rates in order to smoothly direct inflation toward its 2% target. “While the BOJ may not publicly state it, raising rates could help halt the yen’s decline,” remarked Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management. “Takaichi and Katayama did not voice any opposition to another BOJ rate increase, further elevating the likelihood of a December hike rather than a January adjustment.” Nonetheless, uncertainty looms over whether the BOJ can execute a December hike without upsetting Takaichi’s advisers, who have cautioned against the perils of an imminent increase. Further complicating matters is the Fed’s indecision on whether to cut rates during its two-day meeting ending December 10. If the Fed maintains its current stance due to inflation concerns or downplays future cuts, a rise in the dollar could weaken the yen and pressure the BOJ to hike next month. Conversely, a Fed rate reduction could bolster the yen and alleviate immediate pressure on the BOJ. However, this scenario may also prompt questions about the U.S. economy’s health and the future of BOJ rate adjustments. Yet, the recent hawkish signals from the BOJ serve as a crucial reminder to markets about the risks associated with presuming that the central bank will keep rates low indefinitely. “Markets seem to believe Takaichi will pressure the Bank of Japan into extending low rates, but I maintain that we will still witness the BOJ raising rates,” stated Kristina Hooper, chief market strategist at Man Group in New York. “There is a genuine eagerness to normalize monetary policy.” (Reporting by Leika Kihara; additional reporting by Makiko Yamazaki and Yoshifumi Takemoto in Tokyo, Tom Westbrook in Singapore; Editing by Sam Holmes)<\/p>\n","protected":false},"excerpt":{"rendered":"
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