TOKYO (Business Emerge/ASIA): The Bank of Japan is expected to indicate at its meeting next week that it will continue moving interest rates higher, with policymakers preparing to emphasise that the timing of additional steps will depend on how previous increases influence overall economic activity.
The review, scheduled for December 18 and 19, comes as financial markets have largely anticipated a rise in the benchmark rate to 0.75 percent from 0.5 percent. Market expectations shifted after recent public comments from Governor Kazuo Ueda, which investors interpreted as signalling an upcoming adjustment.
Recent market pricing reflects growing attention on how the central bank plans to navigate borrowing costs after the expected increase. Investors are analysing how close Japan may be to a so-called neutral level, referring to a point where monetary settings neither accelerate nor slow economic conditions. Internal evaluations on this topic may be updated, although officials are not expected to rely on this metric as the central explanation for future policy moves.
Discussions within the institution suggest that future decisions will prioritise real-time developments, including changes in lending activity, company financing patterns and broader shifts in consumption and investment. Inflation in Japan has remained above the two percent mark for more than three years, which has kept real interest rates significantly below zero. Policymakers intend to highlight this gap as part of the rationale for maintaining a gradual tightening approach.
Officials familiar with internal views have indicated that current borrowing costs remain low when adjusted for price levels, which they say gives space for a phased series of hikes if needed. A move to 0.75 percent would place the policy rate near levels last seen roughly three decades ago, marking a notable shift after years of ultra-loose conditions.
Analysts in financial markets have questioned whether the central bank may soon pause tightening once the rate reaches the lower edge of the institution’s existing estimate of the neutral range, currently viewed as roughly 1.0 to 2.5 percent. However, policymakers plan to counter this assumption by clarifying that the neutral range is one of several reference points rather than a deciding factor on immediate steps.
Internal teams will continue updating calculations on the neutral range based on new data, though these findings are not expected to become public until sometime next year. The concept itself is difficult to measure because it is influenced by variables such as productivity and long-term growth trends.
In recent public remarks, board member Asahi Noguchi cautioned against relying too heavily on neutral rate projections, noting that the most practical approach is to monitor the impact of each rate change and adjust policy gradually. He suggested that policymakers should work within a broad range and review how economic activity and price movements evolve after each action.
As the upcoming meeting approaches, markets will closely watch how the institution describes its policy path and whether officials provide any signals on the pace or scale of future adjustments. Investors will also look for clarity on how the central bank interprets economic momentum heading into the new year, given the potential for shifts in global demand and domestic consumption.
