BOJ Clinches Policy Win Against Political Pressure, But Communication Fog Threatens Future Hikes

Bank of Japan Governor Kazuo Ueda has effectively prepared the ground for a potential interest-rate increase in December, despite earlier political resistance from Prime Minister Sanae Takaichi, who had been critical of monetary tightening. Financial markets—and the recently formed government—are now largely expecting a 25-basis-point hike, which would lift the policy rate to 0.75%, a level Japan has not reached in roughly thirty years. This shift reduces concerns that political pressure might lead the BOJ to postpone further tightening. Even so, the understanding between the government and the central bank remains delicate, and attention has turned to the more uncertain path of future rate increases. That lack of clarity is contributing to unease in the bond market, particularly as the BOJ continues to struggle with communicating its strategy amid disagreement over Japan’s neutral interest rate.

Governor Ueda strongly hinted at a December move earlier in the week, remarking that the BOJ would evaluate the “advantages and disadvantages” of adjusting rates this month. His comments prompted markets to assign more than a 70% probability to a December hike. Importantly, the government—long a supporter of accommodative financial conditions—offered little resistance. Finance Minister Satsuki Katayama said she had no objections to Ueda’s remarks, signaling acceptance of a possible increase. Even advisers known for favoring reflationary policies indicated they might approve the decision if the yen remains under downward pressure. Concerns about the currency’s depreciation played a key role in persuading political leaders to support raising Japan’s deeply negative real rates, bolstering the rationale for Ueda’s previous two hikes. A turning point occurred during Ueda’s November 18 meeting with the Prime Minister, after which both sides described their discussion positively and the Premier acknowledged the central bank’s plan for a gradual and orderly move toward its inflation objective.

To reinforce expectations for a December hike without provoking policymakers, BOJ officials crafted careful messaging. Ueda’s December 1 speech highlighted the achievements of the “Abenomics” framework—strongly associated with Takaichi—and credited it with helping Japan exit prolonged stagnation. He then positioned modest rate increases as a step toward safeguarding long-term economic stability and aligning the goals of the government and the central bank. Former BOJ board member Takahide Kiuchi remarked that Ueda’s address indicated the necessary coordination between the two institutions had been achieved.

Despite this short-term success, the BOJ still faces the challenge of explaining how far it intends to raise borrowing costs in the coming years. The central bank’s estimates for Japan’s nominal neutral rate remain broad, ranging from 1% to 2.5%, a spread that complicates long-term planning and discourages investment in longer-dated bonds. Current swap pricing suggests investors expect policy rates to reach around 1.5% by mid-2027. In contrast, one of the Prime Minister’s economic advisers has argued that rates should remain unchanged until 2027 once they reach 0.75%. Ueda acknowledged on Thursday that it is difficult to judge the upper limit of future rate hikes. As Nomura strategist Mari Iwashita noted, insufficient reassurance about ongoing tightening risks weakening the yen, while signaling an aggressive path could heighten government concerns.