Interest rates are set to hit a 30-year high! The Bank of Japan is prepared to raise rates in December, causing the Japanese yen to strengthen.

According to informed sources, the Bank of Japan is prepared to raise interest rates at a policy meeting later this month, provided that there is no major impact on the economy or financial markets during this period. The sources said the Bank of Japan will also indicate that if its economic outlook is achieved, it will continue to raise interest rates, while remaining cautious about how high the rates will ultimately be raised to. Boosted by this news, the yen strengthened. As of press time, the yen against the dollar rose by 0.36% to 154.58 yen per dollar. The sources said Bank of Japan officials believe there is a high likelihood of raising the benchmark interest rate by 25 basis points to 0.75% at this month's policy meeting. If the Bank of Japan raises interest rates as scheduled, it will bring Japan's policy rate to its highest level since 1995. Overnight swap indices indicate that traders see a 90% chance of the Bank of Japan raising interest rates this month, compared to less than 60% a week ago. The sources added that the Bank of Japan will continue to carefully review the latest data and information before making a final policy decision, up to the last moment. The Federal Reserve's interest rate decision to be announced next week and any signals about the future of US interest rates could also impact the market and the yen. Meanwhile, the focus in the market is on how the Bank of Japan will actively signal further rate hikes. The sources said that as the impact of US tariffs becomes clearer and high corporate profits provide room for wage increases, Bank of Japan officials are evaluating that the likelihood of achieving their economic outlook has increased. The sources said the Bank of Japan may suggest the need to review the economic response to each interest rate hike to determine the appropriate level of borrowing costs. The sources said that considering real interest rates are still below zero, financial conditions will continue to support the economy. Bank of Japan officials see the rate hike as an adjustment to accommodative monetary policy, rather than tightening. This indicates that interest rates have not reached a neutral level that neither stimulates nor restrains the economy. The Bank of Japan's estimate of the neutral interest rate is within a broad range of 1% to 2.5%. The sources said Bank of Japan officials find it difficult to precisely determine this level or narrow the range. As the yen has become the worst-performing currency among the Group of Ten (G10) currencies so far this quarter, the Bank of Japan's actions may help support the yen. Mark Cranfield, strategist at Markets Live, said, "Currently, on a calm Friday, market reaction has been relatively mild. But as the global trading session unfolds, the yen's gains may expand, as the market has not fully digested the possibility of the Bank of Japan continuously raising interest rates." "Although this is not a fundamental scenario for many investors, Bank of Japan Governor Haruhiko Kuroda may see the current government's tacit approval as a narrow window to reach a neutral rate. This will be a tailwind for the yen's strength." Bank of Japan Ready to Raise Interest Rates in December It is worth noting that there have been reports on Thursday indicating that key officials in the Kishida administration of Japan will not try to stop the Bank of Japan if it decides to raise rates in December, even though some senior officials oppose the timing of this rate hike. This position of the Japanese government increases the likelihood of the central bank raising rates this month. Although the Bank of Japan is independent of the government, under a joint agreement from 2013, both sides agreed to strengthen policy coordination to overcome deflation and achieve sustainable economic growth. With Kishida Sanae elected as Japan's Prime Minister, her supportive stance on accommodative monetary policy has sparked speculation in the market that she may try to influence the Bank of Japan to raise rates at a slower pace. However, some analysts have pointed out that the political pressure on the Bank of Japan to maintain low rates seems to have eased. Mutoh Kazuo, former head of monetary policy at the Bank of Japan, predicts that as one of Kishida Sanae's key priorities is to help Japanese families cope with high inflation, this prime minister known for advocating accommodative monetary policy will allow the Bank of Japan to proceed with rate hikes. Earlier this week, Kuroda released a clear hawkish signal. In a speech to local business leaders in Nagoya on Monday, he said the Bank of Japan "will weigh the pros and cons of raising policy rates and make a decision based on domestic and international economic, inflation, and financial market conditions at the appropriate time." He added that any rate hike is only an adjustment to the level of accommodation, and the overall environment remains accommodative. These remarks suggest that the Bank of Japan is very likely to take action this month. By mentioning a specific policy meeting, Kuroda is likely hinting that the possibility of taking rate action is increasing. Looking back to the end of December last year, the Bank of Japan Governor explicitly promised to carefully assess economic conditions at the next meeting - and it was at that meeting that the Bank of Japan ultimately decided to raise rates. Some recently released economic data also support market expectations for a rate hike by the Bank of Japan. According to data released by the Japanese Ministry of Internal Affairs and Communications last Friday, Tokyo's consumer prices excluding fresh food rose by 2.8% year-on-year in November, slightly higher than the median estimate of 2.7% by economists, and unchanged from the previous month; the core CPI index, which further excludes energy, also rose by 2.8%, the same as the previous month. Meanwhile, a report from the Ministry of Economy, Trade, and Industry stated that industrial output in October rose by 1.4% month-on-month, far exceeding the market's expected decline of 0.6%. These economic data may enhance the Bank of Japan's confidence that its economic outlook is gradually materializing, and push the central bank further toward monetary policy normalization. Furthermore, early signs of Japan's 2026 wage negotiations show that wages will once again see solid growth, providing a basis for further rate hikes by the Bank of Japan. The largest labor union organization in Japan, Rengo, with 7 million members, plans to seek a wage increase of 5% or more in the 2026 labor-management negotiations. This is the same demand as in 2025, and it ultimately achieved the largest wage increase in 34 years this year.