Bank of Japan prepares for December interest rates hike on continued yen weakness

The Bank of Japan is moving toward a possible interest rate hike next month as the yen trades near ¥156 per dollar, according to Reuters.

The bank’s tone has changed fast over the past week, and officials are now pointing at the inflation risk created by the weak yen, after months of worrying about the U.S. economy instead.

A key meeting between Prime Minister Sanae Takaichi and Governor Kazuo Ueda last week eased political pressure to keep rates low, clearing the way for a policy move in December.

The timing is tight because the Federal Reserve meets a week before the BOJ, and its decision is expected to influence yen trading.

That shift in communication is landing at a moment when officials say the weak yen looks more like a trend than a short move. The concern is that currency weakness could push consumer prices higher for longer.

A Reuters poll shows that a small majority of economists now expect a hike at the December 18–19 meeting, with all of them seeing the rate at 0.75% by March.

Officials signal readiness to act

Inside the bank, several members of the board are clearly ready for a move. Junko Koeda said last week the BOJ must keep pushing real interest rates higher because prices have been “relatively strong.”

Kazuyuki Masu said the timing of a hike was “nearing,” and those comments sent the five-year Japanese government bond yield to a 17-year high on Tuesday. Both comments open the door for Koeda and Masu to join the two hawks who tried, without success, to raise rates in September and October.

Even Kazuo Ueda, who markets see as the board’s most cautious voice, used different language when he told parliament the BOJ would discuss the “feasibility and timing” of a rate hike in upcoming meetings. That is a notable change from earlier remark,s where he said there was no preset timeline for a move.

People familiar with the matter say the board now believes the weak yen could push underlying inflation higher in a more lasting way, and that is one of the main metrics the bank watches when deciding how soon to raise rates.

ETF holdings hit record as BOJ prepares long sale plan

The BOJ’s latest financial report shows the market value of its ETF holdings reached a record ¥83.2 trillion at the end of September.

That is an 18.5% jump from a year earlier in the first half of fiscal 2025. A record ¥46 trillion of the total came from paper gains during the stock rally. The bank said in September it plans to sell all of its ETFs over time, a process it expects to take more than a century.

The large unrealized gains suggest most of the profits will eventually flow into the government’s budget after expenses.

The bank’s ETF dividend income rose 18.7% to ¥1.5 trillion, adding to its revenue.

The BOJ has been buying ETFs since 2010, expanding those purchases heavily in 2013 when its big easing plan began. That policy ended in March last year.

The bank said it will sell ETFs at a pace of ¥330 billion per year by book value to avoid disturbing the market. A person familiar with the plan said sales could start early next year.

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