On December 24, the Financial Association reported (Editor: Huang Junzhi) that Bank of Japan Governor Kazuo Ueda stated on Wednesday that he expects the Japanese economy to get closer to sustainably achieving the central bank's 2% inflation target next year, and hinted that the timing for the next rate hike is approaching.

However, at the same time, he warned that it is necessary to carefully study the impact of the "high uncertainty" surrounding the overseas economy, especially the economic policies of the incoming US President Donald Trump. Additionally, Ueda pointed out that the outlook for wage negotiations between Japanese companies and labor unions next year is also crucial.

This is consistent with Ueda's remarks last week. He stated that it is necessary to wait for more information regarding Trump's policy stance and domestic wage developments before raising borrowing costs again.

He said in his latest speech, "The timing and pace of adjusting the degree of monetary easing will depend on the developments of economic activity, prices, and future financial conditions."

These remarks highlight the Bank of Japan's determination to continue raising short-term interest rates next year. Currently, the short-term interest rate set by the Bank of Japan is 0.25%. Most Analysts expect the Bank of Japan to raise the interest rate to 0.5% in January or March next year.

In 2016, the Bank of Japan lowered the benchmark rate—short-term interest rates—from zero to a historical low of -0.1%, but ended the "negative interest rate era" in March this year, and raised its short-term policy target to 0.25% in July. The Bank of Japan has signaled that it is prepared to raise interest rates again if wages and prices move as expected.

Ueda stated that as labor shortages push up wages, Consumer spending has shown signs of improvement. He emphasized that after years of aggressive monetary stimulus, the Bank of Japan has made progress in sustainably achieving its price target.

He further pointed out that during the current transitional phase to achieve a 2% inflation rate in a sustainable manner, the Bank of Japan will maintain a policy interest rate below neutral to support the economy. However, he also said that if the economy continues to improve, the Bank of Japan will raise interest rates, as maintaining excessive monetary support for too long could exacerbate inflation risks.

When looking ahead to 2025, Ueda stated, "Our forecast is that the virtuous cycle will further strengthen, bringing the Japanese economy closer to a sustainably stable 2% inflation rate, while wages will also rise."

"Recently, prices of a range of commodities and services have begun to rise moderately, reflecting the increase in wages. In this context, we believe that sustainably achieving the 2% inflation target is just around the corner," he added.

Ueda also added on Wednesday that wage increases in Japan must align with the 2% inflation rate, and high profits earned by large companies must be redistributed to small businesses and households for the economy to sustainably reach the Bank of Japan's inflation target.

"We will utilize our branch network to study how wage increases in small and medium-sized enterprises will evolve," he said.

The Bank of Japan will release its quarterly report on regional economic conditions on January 9, which may include views on whether wage increases are spreading nationwide. This report may be one of the factors the Bank of Japan's Board of Directors carefully considers when making its next policy decision on January 24.