Bank of Japan Likely to Raise Interest Rates in December Amid Yen Decline

Post by : Saif

The Bank of Japan (BOJ) is likely to raise interest rates at its December policy meeting, according to a Reuters poll of economists, as conditions for tightening monetary policy gradually fall into place. A slim majority of experts expect the BOJ to lift short-term interest rates from 0.50% to 0.75% during its December 18-19 meeting, continuing its efforts to normalise monetary policy after years of ultra-low rates.

The decision comes as the Japanese yen has fallen sharply in recent months, reaching a 10-month low against the U.S. dollar and its weakest level ever against the euro. Economists say the yen’s decline increases the risk of imported inflation, which strengthens the case for a cautious rate increase. Takeshi Minami, chief economist at Norinchukin Research, noted that the BOJ may use the move as a fine-tuning step in its ongoing monetary easing strategy.

Prime Minister Sanae Takaichi, who took office a month ago, has urged the BOJ to coordinate closely with government policies aimed at reflating the economy. Takaichi supports expansionary fiscal and monetary measures and has recommended caution in raising rates to avoid slowing economic growth. Despite Japan’s recent economic contraction in the July-September quarter, experts say underlying private demand remains strong.

The last rate increase by the BOJ occurred in January, when rates were lifted by 25 basis points. According to the poll conducted between November 11 and 18, 53% of economists expected the BOJ to raise rates in December. All respondents who offered forecasts said that rates would reach at least 0.75% by the end of March 2026. The median prediction for the end of 2026 remains at 1.00%, unchanged from previous surveys.

The pace of wage increases will be an important factor for the BOJ’s decision. Governor Kazuo Ueda highlighted that the timing of next spring’s annual labour-management wage negotiations will influence policy. Most economists in the poll, however, do not expect wage increases next year to exceed this year’s 5.25% level. While wages are expected to continue rising due to strong corporate earnings, experts predict a slightly slower pace in 2026, as overall corporate profits may dip modestly compared with 2025.

Economists also point to Japan’s manufacturing sector, which may post weaker profits than expected. This could limit the scale of wage growth and influence the BOJ to maintain a gradual and careful approach to monetary tightening. Harumi Taguchi, principal economist at S&P Global Market Intelligence, said that if wage momentum is confirmed and coordination with the Takaichi administration is smooth, a December rate hike appears very likely.

Overall, Japan is entering a delicate period where the central bank must balance the need to control inflation risks linked to a weaker yen while supporting economic recovery. The upcoming rate decision will be closely watched by global markets, as it may signal the BOJ’s willingness to gradually adjust long-standing policies that have kept borrowing costs near zero for decades.

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