With the relaxation of the Japanese government’s attitude, the probability of the Bank of Japan (BOJ) raising interest rates in December has increased significantly. According to Reuters citing government sources, the BOJ is likely to raise the policy interest rate from 0.5% to 0.75% at its meeting on December 18-19, which will be the first interest rate hike since January 2025.

Signals of interest rate hikes have long been laid out. BOJ Governor Kazuo Ueda clearly stated on December 1 that he will “timely weigh the pros and cons of interest rate hikes and make decisions”, and revealed that he has had smooth communication with Prime Minister Sanae Takaichi, breaking the previous policy resistance. The core reasons for promoting the interest rate hike are the continuous depreciation of the yen and high inflation. The 10-year break-even inflation rate has risen to the highest level since 2004, and the 10-year government bond yield has even exceeded 1.9%, a new high since 2007.

Market reactions are divided. The Nikkei 225 Index fell by 1.89% in a single day due to expectations of rising corporate financing costs, while the yen exchange rate against the U.S. dollar only appreciated slightly by 0.4%-0.5%. A strategist at SMBC Nikko Securities pointed out that against the background of rising inflation expectations, interest rate hikes are difficult to push up real interest rates, and the long-term depreciation pressure on the yen has not been fundamentally relieved. At present, the market’s bet on the probability of an interest rate hike has approached 80%.