1. So far, what has the Bank of Japan said and done?

The Bank of Japan ended negative interest rates in March and raised its short-term policy target level to 0.25% in July. Bank of Japan Governor Kazuo Ueda stated on November 18th that the economy is moving towards sustained wage driven inflation, which is the latest sign that another interest rate hike is imminent.

Ueda also talked about the benefits of timely interest rate hikes, stating that pushing up borrowing costs from extremely low levels will help achieve long-term economic growth.

This wording is similar to the one used by the Bank of Japan during its last interest rate hike cycle in 2007. Toshihiko Fukui, governor of the Bank of Japan at that time, said that early and gradual withdrawal of stimulus measures would help prevent the emergence of foam, so as to achieve stable and lasting economic growth.

Under Fukui's leadership, the Bank of Japan raised interest rates from zero to 0.5% twice in February 2007. But the following year, in response to the global financial crisis, the central bank was forced to re-enter the cycle of interest rate cuts. Interest rates will remain near zero for the next 16 years.

2. When may the Bank of Japan raise interest rates next time?

Ueda believes that wages will continue to rise and promote consumption, thereby allowing businesses to continue pushing up prices and meeting the prerequisites for further interest rate hikes.

Although warning of the uncertainty and market volatility in the US economy, Ueda said that the Bank of Japan does not necessarily have to wait until all these risks disappear, indicating that he is open to raising interest rates again at the next meeting on December 18-19.

The policy makers of the Bank of Japan will not promise a predetermined timing for the next interest rate hike, but they believe that market expectations for a rate hike to 0.5% by the end of March are not a problem.

3. Where does the Bank of Japan consider the neutral interest rate to be?

If the economy continues to recover, the Bank of Japan will continue to raise its short-term policy rate, approaching Japan's neutral rate, which is a level where monetary policy neither shrinks nor expands.

Although inflation has been hovering around 2% for over two years, the Bank of Japan has maintained short-term interest rates at 0.25%, which means that inflation adjusted real borrowing costs are still very low.

By raising borrowing costs to a level considered economically neutral, the Bank of Japan can cancel what it considers excessive monetary stimulus measures.

However, estimating unobservable neutral interest rates is not easy due to different models producing different results. Major central banks use neutral interest rates as benchmarks, but warn against excessive reliance on neutral interest rates when implementing monetary policy.

The staff of the Bank of Japan used different models to estimate that Japan's inflation adjusted real neutral interest rate ranges from -1% to+0.5%. This means that if inflation reaches the Bank of Japan's target level of 2%, the Bank of Japan can at least raise its short-term interest rates to around 1% without cooling down economic growth.

According to the current forecast for October, the Bank of Japan expects short-term interest rates to approach what it considers a neutral level in the second half of the three-year forecast period ending in March 2027, which means some time after October 2025.

Although Naoki Tamura, a member of the board of directors of the Bank of Japan, stated in September that the bank must raise interest rates to at least 1% by the end of next year at the earliest, his colleagues remained silent on the neutral interest rate level. Although Naoki Tamura, a member of the board of directors of the Bank of Japan, stated in September that the bank must raise interest rates to at least 1% by the end of next year at the earliest, his colleagues remained silent on the neutral interest rate level. Ueda has stated that it is difficult to make reliable estimates due to a lack of data, as Japan's interest rates have remained at zero levels for a long time.

4. What are the key triggering factors to be aware of?

Leaving aside the neutral interest rate, the trend of the Japanese yen will have a significant impact on the timing of the Bank of Japan's interest rate hike. The weak yen was a factor that prompted the Bank of Japan to raise interest rates in July, as it pushed up import costs and broader inflation.

The uncertainty of US President elect Trump's economic policies has also complicated the decision of the Bank of Japan. The uncertainty of US President elect Trump's economic policies has also complicated the decision of the Bank of Japan. Many of his policies are believed to lead to inflation and may prevent the Federal Reserve from cutting interest rates too much, thereby keeping the yen weak against the US dollar.

5. When may the Bank of Japan provide more hints?

The October CPI, which will be released on November 22, will be closely monitored to find clues on whether companies are passing on rising labor costs through the increase in service prices.

Moderate member of the Board of Governors of the Bank of Japan, Fumiaki Nakamura, is cautious about raising interest rates too quickly. He will deliver a speech and hold a press conference on December 5th.

The Bank of Japan will release its "Short Observation" quarterly business survey on December 13th. If the data shows stronger business confidence, capital expenditure plans, and corporate inflation expectations, the opportunity for a rate hike in December may increase.