Fintech News APP has learned that the Bank of Japan is preparing for another interest rate hike, but the market is still speculating on how quickly it will raise the still low borrowing costs. Below is the Bank of Japan's recent communication on the possible timing and extent of the next interest rate hike.

What has the Bank of Japan said and done so far?

The Bank of Japan ended its eight-year negative interest rate policy in March of this year, and unexpectedly raised the policy rate by 15 basis points to 0.15%-0.25% in July. Bank of Japan Governor Haruhiko Kuroda stated on Monday that the economy is moving towards sustained wage-driven inflation. This statement is seen as the latest signal that another interest rate hike is imminent.

Kuroda also discussed the benefits of timely interest rate hikes, stating that raising borrowing costs from extremely low levels would help achieve long-term economic growth. This language is similar to what the Bank of Japan used during the last rate hike cycle in 2007.

Former Bank of Japan Governor Toshihiko Fukui once stated that a gradual exit from stimulus measures would help prevent bubbles and achieve stable, sustained economic growth. Under Fukui's leadership, the Bank of Japan raised interest rates from zero to 0.5% through two rate hikes in February 2007. However, the following year, in response to the global financial crisis, the Bank of Japan was forced to re-enter a rate cutting cycle and kept rates near zero for the next 16 years.

When will the Bank of Japan raise interest rates next?

Kuroda believes that wages will continue to rise, stimulating consumption, enabling businesses to raise prices further, which will meet the prerequisites for further interest rate hikes. While Kuroda has issued warnings about the uncertainty and market volatility brought by the US economy, he has stated that the Bank of Japan does not necessarily have to wait for all these risks to disappear, indicating his openness to another rate hike at the December policy meeting.

Japanese policy makers at the central bank have not committed to a specific timing for the next interest rate hike. However, they believe that the market's expectation for the Bank of Japan to raise the policy interest rate to 0.5% by the end of March next year is reasonable.

Where does the Bank of Japan consider the neutral interest rate to be?

If the Japanese economy continues to recover, the Bank of Japan will continue to raise its short-term policy rate to approach Japan's neutral interest rate, a level that neither stimulates nor restrains economic growth.

The Bank of Japan currently maintains the short-term policy rate at 0.25%. However, Japan's inflation rate has been hovering around 2% for over two years, indicating that the real borrowing costs adjusted for inflation remain low. By raising the borrowing costs to a level considered neutral for the economy, the Bank of Japan can unwind what it perceives as excess monetary stimulus measures.

However, estimating the neutral rate is not easy as different models yield different results. Bank of Japan staff have estimated that the real neutral interest rate adjusted for inflation in Japan ranges from -% to around 0.5%. This implies that if inflation reaches the Bank of Japan's 2% target, the Bank of Japan could raise short-term interest rates to around 1% without cooling economic growth.

According to forecasts in October, the Bank of Japan expects that the short-term interest rate will approach its perceived neutral level by the latter part of the "three-year forecast period ending in March 2027."

Although Bank of Japan board member Naoki Tamura had stated in September that the Bank of Japan must raise rates to at least 1% by the end of next year, his colleagues remain silent on the level of the neutral interest rate. Katsuo Ueda also mentioned that due to the lack of data, it is difficult to make reliable estimates as Japan's rates have been held at zero for an extended period.

What are the key triggering factors that need to be noted?

Setting aside the discussion on neutral interest rates, the trend of the Japanese Yen will have a significant impact on the timing of the Bank of Japan's interest rate hike. The weakness of the yen is one factor that prompted the Bank of Japan to raise interest rates in July, as the weak yen pushed up import costs and broader inflation.

The uncertainty brought by the economic policies implemented by President Trump after his election has also complicated the decisions of the Bank of Japan. Many of Trump's policies are believed to lead to a resurgence of inflation and may prevent the Fed from significantly cutting interest rates, thereby keeping the yen weak against the dollar.

When might the Bank of Japan provide more hints?

Investors are closely watching the October CPI data in Japan, scheduled to be released on November 22. They will look for clues on whether companies are passing on the higher labor costs through service price increases.

Toyoaki Nakamura, a member of the Bank of Japan board who holds a moderate stance, is cautious about raising interest rates too quickly. He will give a speech and hold a press conference on December 5.

Furthermore, the Bank of Japan will release its quarterly economic survey on December 13. If the data shows strengthening business confidence, capital expenditure plans, and corporate inflation expectations, the possibility of an interest rate hike in December may increase.