Could the Bank of Japan's 'vague statements' actually conceal a risky move to raise interest rates earlier than expected?

Last week, the Bank of Japan governor’s vague remarks about the timing of the next rate hike once again stimulated yen short sellers, but behind his cautious wording lay a firm clue: the BOJ may act earlier than the currency market anticipates.

The Bank of Japan raised interest rates to their highest level in 30 years last Friday, and Governor Kazuo Ueda made it clear in the post-meeting press conference that more rate hikes are on the horizon.

Although this move pushed Japanese bond yields to multi-decade highs, the yen's trajectory hinges on how the market interprets the “hesitation” in monetary policy—what it implies for the US-Japan interest rate differential, and for some investors, the narrowing of this gap is too slow.

However, analysts and sources familiar with the central bank’s thinking suggest that the BOJ’s ambiguous communication may aim to retain flexibility on the precise timing of rate hikes, not signaling any lack of resolve to continue raising borrowing costs.

“The Bank of Japan might aim to resume rate hikes at a pace of roughly once every six months,” said former BOJ Policy Board member Makoto Sakurai. He predicts three more rate hikes, which would bring rates to 1.5%, including one around June or July of next year.

Sakurai, who still maintains close contact with current policymakers, noted: “Recent surveys indicate that inflation has taken root in Japan’s economy. If inflation accelerates, the BOJ could raise rates sooner than expected.”

Markets currently anticipate the next rate hike to occur in the second half of next year, but others hold a more hawkish view.

Some sources suggest that while the timing heavily depends on forthcoming data, there is a slight possibility that the BOJ could raise rates again as early as April next year. JPMorgan analysts also expect the next rate hike in April, followed by another in October next year.

Hawkish Signals

Following last Friday’s meeting,$JPY/USD (JPYUSD.FX)$the exchange rate fell by 1.4%. This decline prompted the Japanese finance minister to issue his sternest warning yet on Tuesday, stating that Tokyo is prepared to intervene in the market to prevent further currency depreciation.

For the market, Ueda's remarks last Friday forced them to speculate how far the Bank of Japan's policy interest rate is from being considered "neutral" for the economy, with the current estimated range being quite broad, between 1.0% and 2.5%.

Although Ueda did not narrow the estimated range for the neutral interest rate, he stated that there is still "some distance" before the Bank of Japan's policy rate approaches the bottom of that range, indicating that further interest rate hikes are under discussion.

In addition, there are other hawkish clues.

First, the Bank of Japan has raised its outlook on overseas growth and stated that concerns about the impact of U.S. tariffs have eased, declaring that the period dominated by tariff risks in policy debates, which forced it to pause its interest rate hike cycle, has come to an end.

The Bank of Japan has maintained its commitment to continue raising interest rates and expects that companies will continue to increase salaries next year, highlighting its growing belief that Japan is on track to sustainably achieve its 2% inflation target.

Ueda also stated that Japan's real interest rates remain "very low," with no signs that past rate hikes have led to a significant tightening of financial conditions, highlighting the economy's resilience to rising borrowing costs.

The yen is still key.

Like past policy shifts, the weakness of the yen may significantly influence the Bank of Japan's decision on when to raise interest rates.

The Bank of Japan's exit from large-scale stimulus measures and the subsequent interest rate hikes last year coincided with a decline in the yen, which triggered warnings from the government. The government is concerned that rising living costs will impact households.

As a sign that the Bank of Japan is wary of exchange rates, Ueda stated that some committee members pointed out that the recent decline of the yen is pushing up prices by increasing import costs, and may affect potential inflation.

It is rare for the president to disclose the details of the policy meeting's deliberations before the minutes are released.

A source said, "If the depreciation of the yen intensifies inflationary pressures, that will become a reason to support interest rate hikes." Two other sources also expressed the same view.

Akira Otani, a former senior official at the Bank of Japan and currently the Managing Director of Goldman Sachs Japan, expects another interest rate hike in July next year, but he added that the movement of the yen may affect the timing.

He said, "From the concerns expressed by the Bank of Japan at the press conference regarding the upward price risk, if the yen continues to decline, the next interest rate hike may be brought forward."

What highlights the committee's deepening awareness of the growing inflationary pressures is that two committee members expressed dissent regarding the Bank of Japan's price forecasts, believing that underlying inflation has already reached 2% or may hit this level earlier than expected.

In addition to the weakness of the yen, the increasingly severe labor shortage may also drive up labor costs. Analysts say that the government's large-scale spending plans could further increase inflationary pressures by stimulating demand.

The early signs of how the Bank of Japan views such inflationary pressures will be presented at the next policy meeting on January 22-23 next year, during which the committee will release its latest quarterly growth and price forecasts.

Some analysts have stated that while raising price forecasts will strengthen the case for more interest rate hikes, it also raises doubts about the Bank of Japan's view that it has not been too slow in addressing the risks of excessively high inflation.

Naoya Hasegawa, Chief Bond Strategist at Okasan Securities, stated: "When real interest rates are deeply negative, it is difficult to expect that the downward trend of the yen will change, even with verbal warnings from the government."

"The market is struggling to see where the terminal interest rates might be, as people are increasingly concerned that the Bank of Japan has fallen behind."

Editor/melody