Some BOJ board members flag possible further rate hikes as neutral rate remains uncertain
At a two-day meeting, Company Bank of Japan board members noted that Japan's real policy rate remains very low and flagged the possibility of further hikes. The BOJ raised the policy rate to 0.75%; a bank study placed the neutral rate between 1% and 2.5%, but members warned that pinpointing it is difficult. Officials, including Mr. Kazuo Ueda and Ms. Sanae Takaichi, face trade-offs between currency-driven import price pressures and rising bond yields. Analysts such as Mr. Ryutaro Kono of Company BNP Paribas say periodic hikes may be likely, and policymakers emphasized flexibility as uncertainty persists.
During a two-day meeting, Company Bank of Japan (BOJ) board members signaled the possibility of additional policy rate increases after noting that Japan's real policy interest rate remains exceptionally low despite a recent hike. One of the nine board members bluntly observed that Japan's real policy rate is currently the lowest in the world, highlighting the depth of the challenge confronting policymakers.
Members emphasized that the BOJ is still working to identify a neutral policy rate — the rate that neither stimulates nor restrains economic activity. A study presented at the meeting estimated the neutral rate to lie in a wide band of roughly 1% to 2.5%. In effect, board participants agreed with the view of Mr. Kazuo Ueda, the Governor of the BOJ, that pinpointing that level is difficult and uncertain. One member remarked, "We can say there is still a significant distance to reach the neutral interest rate," while Mr. Ueda told reporters after the December 19 decision that the determination of the neutral rate remains challenging.
The debate produced a range of policy views. Some members urged the BOJ to adopt a flexible, data-dependent approach as it interprets the neutral rate, warning against fixation on a single point estimate. Others argued that the bank should remain adaptable in its operational decisions, adjusting the pace and scale of tightening as economic conditions — notably currency movements and import price pressures — evolve.
At the conclusion of the meeting, the BOJ raised its policy rate to 0.75%, the highest level since 1995. Markets were not surprised; investors had largely anticipated a tightening move after Mr. Ueda signaled the possibility of dialing back monetary easing. Nonetheless, the decision showcased the BOJ's delicate balancing act: combatting inflationary pressures arising from a weakening yen and higher import costs while avoiding an excessive spike in domestic bond yields.
Prime Minister Ms. Sanae Takaichi, who earlier this year described rate increases as "stupid," has so far refrained from publicly criticizing Mr. Ueda's moves and has emphasized tackling the surge in the cost of living. Officials nevertheless face the practical challenge of preventing a too-rapid rise in bond yields as the government prepares the 2026 budget, expected late in December. Benchmark 10-year yields recently touched 1.97%, their highest level in 18 years, prompting the BOJ governor to warn that yields are rising "somewhat fast."
Market analysts cautioned that a combination of policy normalization and currency-driven price pressures could force the BOJ to tighten at a faster pace than currently planned. Mr. Ryutaro Kono, chief Japan economist at Company BNP Paribas, argued that the Takaichi administration's preference for low rates means hikes are likely to occur roughly every six months, and he warned that "the risk of the BOJ needing to speed up tightening due to currency changes is not small."
Implications for markets are broad. A faster-than-expected path of rate hikes could push Japanese government bond yields higher and strengthen the yen, which would dampen import-driven inflation pressures but potentially destabilize asset markets sensitive to rates. Conversely, prolonged uncertainty about the neutral rate could prolong volatility in interest-rate sensitive sectors and create ambiguity for investors assessing price resistance and support levels across asset classes — including equities and cryptocurrencies. Traders and portfolio managers should therefore watch real policy rates, 10-year yields, and yen movements closely for signs that the BOJ may need to accelerate or slow its tightening cycle.
In summary, the meeting highlighted both the BOJ's determination to address inflationary pressures and the persistent uncertainty around the neutral rate. Policy flexibility and careful communication will remain crucial as Japan navigates the trade-offs between currency dynamics, domestic price stability, and financial market functioning.
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