Bank of Japan Governor Kazuo Ueda has all but locked in a December interest-rate rise, telling investors the bank is now focused on stopping inflation from overshooting its target after declaring victory in its 14-year battle to reach it.
The bank held its policy rate at 1.25% last week, but Ueda said the decision to wait was about scrutinising economic and price developments “a bit more” — language that echoed remarks made in July, shortly before the bank raised rates in September. He added that the board will debate policy with a focus on upside risks to prices, including at its next meeting, signalling a high probability of a rise to 1.5% in December.
The case for tightening has strengthened. Japan’s economy grew at an annualised 1.4% in the second quarter, as firms kept spending despite headwinds from the Middle East conflict, while annual core inflation reached 2.1% in September, above the bank’s 2% target, as mounting price pressures outweighed the dampening effect of fuel subsidies.
A separate Bank of Japan report published on Monday said Japan has made gradual progress towards anchoring inflation around the 2% target, bolstering the case for higher rates. It said underlying inflation has moved towards around 2% over the past few years, and that firms’ inflation outlook appears to be gradually converging around that level, although households’ expectations still vary widely.
What happens after December is far less clear, and that uncertainty is now the central question for markets. Bank staff calculations put Japan’s nominal neutral rate — the level that neither heats up nor cools the economy — at between 1.1% and 2.5%, a wide range that offers only a rough guide to how far borrowing costs could rise. Because the neutral rate cannot be observed directly and estimates vary by model, the bank has deliberately avoided pinning it down.
Former Bank of Japan official Nobuyasu Atago, now chief economist at Rakuten Securities Economic Research Institute, said a December hike was “pretty much a done deal”, but warned that a further rise next year would take the rate to 1.75%, which could be around neutral. Nomura Securities executive rates strategist Mari Iwashita said the bank probably still thinks its rate is some distance from neutral, which would cement the case for hikes up to 1.75% by around March next year, after which it could pause.
The board itself is divided on how far to go. Hawks such as Naoki Tamura argue the neutral rate is likely near 2% and have called for steady increases, while Hajime Takata unsuccessfully proposed a rise to 1.5% at last week’s meeting. Former academic Junko Koeda appeared more cautious, saying only that the neutral rate was “likely significantly above 1%”, while the two doves appointed by Prime Minister Sanae Takaichi are likely in the cautious camp, having dissented against the September hike.
Ueda has also stressed the need to watch how higher borrowing costs affect lending, noting that smaller firms’ lending conditions are tightening, even while maintaining that overall financial conditions remain accommodative. That caution reflects Japan’s unusual position: since gaining independence in 1998, the bank has spent most of its existence battling disinflation and deflation, leaving it with limited experience of how an economy accustomed to ultra-low rates responds to sustained tightening.
Readers should note that the December rise is signalled, not decided: Ueda has indicated a high probability of a hike, but the board has not yet voted on it, and the path beyond December remains an open judgement, not a committed plan.
Note: the featured image is a file photo of Kazuo Ueda from November 2025, not a photograph of the December policy meeting.
Sources: Reuters, “BOJ locks in December hike, but neutral-rate uncertainty muddies outlook”, 2 November 2026, https://www.reuters.com/business/finance/boj-locks-december-hike-neutral-rate-uncertainty-muddies-outlook-2026-11-02/ ; Reuters, “BOJ flags progress in anchoring inflation around target”, 2 November 2026, https://www.reuters.com/world/asia-pacific/boj-flags-progress-anchoring-inflation-around-target-2026-11-02/
