Bank of Japan Signals December Rate Hike to 1.5%

Bank of Japan Governor Kazuo Ueda signaled a high probability that the central bank will raise its policy rate to 1.5% in December. The move follows the bank's declaration of victory in reaching its long-term price target, with annual core inflation reaching 2.1% in September.

Policymakers are currently divided over the economy's neutral rate, which staff calculations estimate between 1.1% and 2.5%. Board members Naoki Tamura and Hajime Takata advocate for faster increases toward 2%, while other members appointed by Prime Minister Sanae Takaichi favor a more cautious approach.

The bank is balancing the need to prevent inflation from overshooting against the risk of destabilizing households and businesses accustomed to decades of near-zero borrowing costs. Governor Ueda noted that the bank is monitoring whether tightening lending conditions for smaller firms will spread to the broader economy.