Analysis-BOJ locks in near-term rate hike, yen may sway timing

Bank of Japan Governor Kazuo Ueda attends a press conference after a BOJ policy meeting in Tokyo, Japan, October 30, 2025. REUTERS/Kim Kyung-Hoon

By Leika Kihara

TOKYO (Reuters) -The Bank of Japan's cautious governor has dropped unusually hawkish hints of an interest rate hike in December or January next year, with the timing likely swayed not just by wage momentum but by moves in the yen.

The central bank kept interest rates steady at 0.5% on Thursday as expected, but Governor Kazuo Ueda said the likelihood of its baseline scenario materialising has heightened - language he had used in the past to signal a rate hike was imminent.

While warning of lingering global uncertainties, the board revised up this year's growth forecast and made few tweaks to its sanguine view of Japan's recovery prospects in a quarterly report released after the meeting.

As was the case before the BOJ's previous rate hike in January, Ueda also elaborated on the triggers for action with an emphasis on the "initial momentum" of next year's wage negotiations.

"Ueda's remarks ... contained many signals that, barring major shocks in the U.S. economy or markets, the probability of a near-term rate hike is rising," said Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG Securities.

"Given Ueda's use of the term 'initial momentum,' we think it is unlikely the BOJ will wait until March wage results," said Yamaguchi, who predicts a rate hike in December.

MORE DATA TO COME

More data will be available by the BOJ's upcoming policy meeting on December 18-19 that would provide hints to next year's wage outlook, including corporate earnings reports and the central bank's "tankan" business survey due on December 15.

Already, Japan's largest labour union group said it would seek wage hikes of 5% or more in 2026, aiming for bumper pay raises for the fourth straight year despite external headwinds.

There could also be early hints on how automakers - a sector Ueda said he was paying particular attention to - set wages as they face the hit from U.S. tariffs. Last year, labour unions at major automakers set pay hike targets in December.

Ueda may also heed to mounting pressure from within his nine-member board to act sooner rather than later. Two board members repeated their proposal, made in September, to hike rates to 0.75%, on Thursday.

U.S. Treasury Secretary Scott Bessent has recently chimed in, urging the government of new Prime Minister Sanae Takaichi, who is known as an advocate of loose monetary policy, to allow the BOJ to raise rates and avoid excessive yen declines.

"A hawkish bloc has solidified within the BOJ policy board" with the hawks having "an external advocate pushing for monetary tightening" in Bessent, said Frederic Neumann, chief Asia economist at HSBC, who predicts a rate hike in December.

"As a new prime minister, it may even be advantageous for Takaichi to get the rate hike out of the way early on in her tenure," he added.

YEN COMPLICATES TIMING

To be sure, the BOJ may opt to play it safe by waiting until its January 22-23 meeting, as most big manufacturers firm up wage plans at the start of the year, some analysts say.

By then, there will be more clarity on the Takaichi administration's budget plans and economic policies. The BOJ, too, can offer a more thorough analysis justifying a rate hike in a quarterly report due after the January meeting.

In the end, however, the timing may depend much on yen moves as a renewed slide in the currency would push up import costs and broader inflation, some analysts say.

The yen fell to a nearly nine-month low against the dollar on Thursday despite Ueda's hawkish comments. Data on Friday showed core consumer inflation in Japan's capital, a leading indicator of nationwide trends, perked up in October and remained above the central bank's 2% target.

Further rises in the cost of living would run counter to Takaichi's pledge to cushion households' blow from inflation.

Former BOJ executive Akira Otani expects the BOJ to hike rates in January, when enough data becomes available on whether companies will weather the tariff hit and keep hiking pay. But he cites the yen as potentially changing the timing.

"At present, we don't see a strong chance of a December rate increase," said Otani, currently managing director at Goldman Sachs Japan. "But the possibility could heighten if yen falls accelerate and increase the risk of inflation overshooting the BOJ's baseline forecast made in October."

(Reporting by Leika Kihara; Editing by Kim Coghill)