Upcoming Policy Meeting
The Bank of Japan (BOJ) is set to hold its final monetary policy meeting of the year on December 18-19, and markets widely expect another 25-basis-point rate hike. This would raise the policy rate from 0.25% to 0.50%. Under Governor Kazuo Ueda’s leadership, the BOJ’s policy framework has focused on fostering a “virtuous cycle” between wages and prices, and recent data improvements support further tightening measures.

Economic Progress via the "Virtuous Cycle"
Governor Ueda has emphasized that higher wages, increased household purchasing power, and improved corporate profits can drive sustainable inflation. This “virtuous cycle” is helping Japan break free from its 25-year deflationary stagnation, which began in 1998. In the first ten months of 2024, nominal wages rose by an average of 4.8% year-on-year, while core-core CPI (excluding fresh food and energy) grew by 2.5%. These figures suggest Japan is steadily approaching its inflation target range.

Three Key Drivers Behind the Expected Rate Hike

1. Wage Growth Outlook
   The Japanese Trade Union Confederation announced a policy framework in October advocating for wage increases of over 5% during next year’s spring labor negotiations. Additionally, several major Japanese corporations have committed to continuing robust wage hikes, supporting inflationary momentum.

2. Inflation Recovery
   Tokyo’s November CPI data significantly exceeded expectations, with the headline inflation rate rising to 2.6% and core-core CPI increasing to 1.9%. These indicators highlight a steady recovery in inflation, reinforcing the need for policy tightening.

3. External Inflationary Pressures
   Global inflation risks may escalate due to potential tariff hikes under former President Donald Trump’s possible return to office. Similar to the 2017-2018 trade wars, Japan could face surging import prices. However, the current depreciation of the yen further weakens Japan’s ability to offset external inflationary pressures, potentially exacerbating the impact.

Potential "Headwinds" from Further Tightening
While a rate hike would align with the BOJ’s inflation targets, it could introduce challenges, including slower economic growth, higher corporate costs, and reduced consumer spending power. Balancing these risks with the need to manage inflation will be a critical task for the BOJ moving forward.

Conclusion and Outlook
As inflation and wage growth data continue to improve, the BOJ is expected to raise rates at its December meeting. However, external economic uncertainties and imported inflationary pressures add a layer of complexity. Forex market participants should closely monitor the BOJ’s policy moves, as they could have significant implications for the yen and global financial markets.