The Bank of Japan is preparing to take a pivotal step in its monetary policy, as most expectations point to a rate hike to 0.75% at the December meeting, followed by a rise to 1% by next September. This shift reflects a clear change in sentiment among economists, with a significantly larger proportion now anticipating a rate increase compared to previous surveys an indication that the coming phase may mark the real end of Japan’s ultra loose monetary era.
Sources familiar with the matter told Reuters that the central bank is preparing to implement its first rate hike since January, a move the government is expected to tolerate despite its sensitivity, particularly amid persistent yen weakness and mounting inflationary pressures. The BOJ is relying on fourth-quarter data especially the Tankan survey and early wage negotiation indicators to provide the foundation for taking action without further delay.
The latest Reuters poll shows that 90% of economists expect a rate hike in December, while roughly two-thirds believe the policy rate will reach 1% before the end of September. Longer term expectations remain anchored around 1% by the end of 2026, with only a minority forecasting an increase to 1.25%, assuming wage growth and economic activity continue to improve.
Bond market pressures have intensified following the government’s announcement that it plans to finance most of its supplementary budget through new debt issuance pushing the 10 year Japanese government bond yield to its highest level in 18 years. This development underscores the market’s sensitivity to fiscal signals and places the central bank in a situation that requires balancing inflation dynamics with economic growth.
On the wage front, optimism is gradually fading. Most economists do not expect wage increases next year to surpass the 5.25% achieved this year, with companies showing greater caution amid global uncertainty and weakening domestic price momentum. Although labor shortages continue to support medium term wage growth, external pressures including U.S. tariffs and strained Japan China relations are prompting firms to be more conservative in their commitments.
Despite Governor Kazuo Ueda describing the recent rise in yields as “somewhat rapid,” he emphasized that any intervention would be limited to exceptional circumstances. Sources within the BOJ said policymakers are not inclined to ramp up bond purchases or conduct emergency operations, as such actions could send signals that contradict the bank’s ongoing normalization efforts.
According to these sources, the current rise in yields is driven by logical factors chief among them investor uncertainty over how far the BOJ may raise rates next year, as well as concerns about the volume of government bond issuance needed to fund an expansionary budget. For this reason, the BOJ does not view the move as disorderly or detached from fundamentals, reducing the likelihood of intervention in the near term.
The 10-year yield is approaching the psychologically significant 2% level, which has not been breached in nearly two decades. However, the BOJ remains focused on the drivers of market movements rather than the specific numerical levels. Any intervention now could mislead markets into believing the bank is defending a particular threshold undermining its attempt to give market forces a greater role in shaping the bond curve.
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