According to Zhiyun Finance APP, the Governor of the Bank of Japan, Kazuo Ueda, is carefully weighing various data at a critical moment before the policy decision on December 19, intending to make a wise choice at the last minute. He will focus on the upcoming Bank of Japan's short-term economic outlook survey (December 13) and the Federal Reserve's interest rate decision before the Bank of Japan's policy formulation. If the economy meets expectations, Ueda may choose to raise interest rates in December, which would be the first time the Bank of Japan has tightened policy three times in a year since the peak of Japan's asset bubble in 1989, with the policy rate expected to rise from 0.25% to 0.5%, reaching its highest level since 2008.

Figure 1

Ueda reiterated the possibility of interest rate hikes in an interview and indicated that the timing is "approaching," as inflation persists, corporate investment plans are clear, wages are rising, and the optimism in annual wage negotiations suggests that the economy is shifting towards a virtuous wage-price cycle. These economic signals have heightened the urgency for rate hikes, causing most economists to revise their expectations of a rate increase from January next year to December. Ueda's statements have also driven a shift in market expectations, with the yields on two-year government bonds climbing to a new high since 2008.

"The next rate hike is very likely to come in December," said Ko Nakayama, chief economist at Okasan Securities and former Bank of Japan official. "The Bank of Japan has indicated that if the economic trajectory aligns with official forecasts, rate hikes will follow, and currently, there is increasing evidence supporting this expectation."

The last time the Bank of Japan raised rates three times in a year was back in 1989. The final rate hike that year coincided with Christmas, and just four days later, the nikkei 225 index reached its historical peak of 38,957.44 points. This series of rate hikes pushed the official bank rate from 2.5% at the beginning of the year to 4.25%, coupled with the Bank's warnings about economic bubbles, exerted heavy pressure on the economy and undermined investors' overly inflated confidence. It wasn't until February of this year, 35 years later, that the stock market finally returned to this historical high.

However, the economic environment facing Ueda Kazuo is entirely different from that of 1989. Today, japan is an aging economy striving to rebuild the cycle of inflation, economic vitality, and growth. Ueda hopes that the central bank can return to orthodox interest rate control policies, and ended the large-scale mmf program in March this year, achieving the first interest rate hike in 17 years, laying an important foundation for policy trends in 2024.

The next interest rate hike will push the policy rate of the Bank of japan from 0.25% to 0.5%, reaching its highest point since 2008. Although this rate level remains relatively low compared to the borrowing costs of major global central banks, it undoubtedly marks a significant shift in monetary policy compared to the negative interest rate policy previously implemented globally, which was maintained at -0.1% for a long time.

Despite the unexpectedly rapid progress of Ueda's policy adjustments, obstacles such as market turbulence have also emerged. The second interest rate hike in July triggered a market collapse but eventually stabilized. Ueda vowed to communicate cautiously before the central bank takes the next step, avoiding direct indications of interest rate actions like the usa Federal Reserve. He chose to use the term 'near' to suggest the possibility of action while maintaining flexibility.

In addition, the governor emphasized that he is closely monitoring the progress of wage negotiations and the risks that the usa economy may face, especially during the current political transition period, as authorities strive for a smooth economic landing. He mentioned that the strong wage growth seen this spring was a key factor driving the bank to begin tapering stimulus measures in March.

Figure 2

As the decision day approaches, the interest rate gap between the usa and japan may narrow, with both sides possibly taking action. Traders have increased their expectations for us Federal Reserve rate cuts and Bank of japan interest rate hikes, estimating the likelihood of a Fed rate cut at around 67% and a BoJ rate hike at about 61%.

"If the us Federal Reserve takes action while the Bank of japan remains inactive, this could reveal the cautious stance of the BoJ and lead to a depreciation of the yen," Nakayama said. "Additionally, this situation may also trigger market turmoil, thereby threatening the stability of financial markets."

Some economists believe that political factors may delay the Bank of Japan's interest rate hike decision until January next year, as Prime Minister Shigeru Ishiba's position has become precarious after the ruling coalition lost its majority in parliament and suffered the worst electoral defeat since 2009 in October, necessitating cooperation with the opposition to pass an extra budget and carry out legal revisions.

Economists Ryutaro Kono and Hiroshi Shiraishi from BNP Paribas pointed out in a report: "Shigeru Ishiba is walking on a tightrope, as his ruling coalition lacks a majority in parliament." "If the government led by Ishiba cannot communicate effectively, the Bank of Japan may choose to wait and address other urgent matters."

However, experts who have long observed the Bank of Japan believe that since Kazuo Ueda accepted the interview request, it may suggest that he is open to a rate hike in December. He only grants two media interviews a year, so the timing of last weekend's interview may be significant.

Naomi Muguruma, the chief fixed income strategist at Mitsubishi UFJ morgan stanley securities, wrote in a report: "If the Bank of Japan is indeed considering a rate hike in January, there would be no need to conduct an interview and signal a rate hike now. The Bank of Japan's actions may be preparing for a further rate hike at the December meeting."