Ueda Kazuo: Interest rate hike "is coming soon," closely monitoring wage trends

According to the Zhitong Finance APP, Bank of Japan Governor Kazuo Ueda stated that the current inflation and economic trends are in line with the Bank of Japan's expectations, and an interest rate hike is "coming soon," but he did not explicitly support a rate increase in December. Ueda said in an interview, "If we are confident or certain that the economy will develop as predicted in our economic and price outlook, especially that potential inflation will rise to 2%, we will adjust the degree of monetary easing at the appropriate time." He indicated that the next interest rate hike is imminent in terms of the economic data returning to normal.

The Bank of Japan governor mentioned that wage growth is approaching a level consistent with a 2% inflation rate, and he hopes to closely monitor wage trends, especially the momentum of the spring 2025 wage negotiations. He added that while confirming growth momentum will take some time, this does not mean that the Bank of Japan cannot decide on policy before then.

Additionally, Ueda pointed out that in light of the incoming Trump administration, it is necessary to closely monitor the U.S. economy, as the elected president has threatened to impose high tariffs on other countries, which could cast a shadow over the global trade outlook. He stated that the trajectory of the world's largest economy is shrouded in "a huge question mark," having previously mentioned the uncertainty of the U.S. economy to help cool expectations of policy changes.

Due to earlier data showing that Japan's inflation accelerated beyond expectations, the market is betting on a rate hike by the Bank of Japan in December, with the yen rising nearly 1% earlier on Friday. As of the time of writing, the USD/JPY exchange rate is 149.77.

The Bank of Japan governor typically gives one to two media interviews each year, and this recent interview took place before the December meeting, possibly as part of the central bank's efforts to strengthen communication. The messaging before the rate hike on July 31 was criticized, as the move surprised some market participants and set the stage for market turbulence in early August.

The next policy meeting of the Bank of Japan will be held from December 18 to 19, followed by another meeting on January 23 to 24. Compared to the global level of 0.25%, the key overnight policy rate remains extremely low.

Currently, investors are increasingly aligning with economists' views that the Bank of Japan is more likely to raise rates in December rather than wait until January next year. At the beginning of November, the overnight swap market reflected a probability of about 30% for a December rate hike, but expectations this week are around 66%. In a Bloomberg survey conducted in October, over 80% of economists expected another rate hike before January next year, while just over half of the respondents believed a rate hike would occur in December.

For more than two and a half years, Japan's main inflation indicators have remained at or above the target level of 2%. The Tokyo price growth data released on Friday exceeded market consensus, enhancing hopes for a positive wage-inflation cycle that the central bank has long sought.

This has partly driven the yen's earlier strength, moving it away from levels where the Japanese government might intervene in the market. Nevertheless, the yen remains much weaker than when Ueda took over the Bank of Japan in April 2023.

The Bank of Japan governor stated that as inflation rises above 2%, further depreciation of the yen could pose significant risks, necessitating "countermeasures" from the central bank Currently, investors and economists are seeking clearer signals from the Bank of Japan regarding its policy intentions. Kazuo Ueda's latest remarks leave room for the possibility of a rate hike in December, but he also does not want to find himself in that position. Ueda stated last week that it is "impossible" to predict the outcome of the next meeting due to a large amount of new data yet to be released.

The special session of the Japanese Diet convened in Tokyo may provide Ueda with another opportunity to express his views on monetary policy. The Bank of Japan governor has pointed out that there was a lack of opportunities to convey the Bank of Japan's thoughts before the rate hike in July this year