Yen depreciation accelerates Bank of Japan rate hikes: December interest rate may rise to 0.75%

【Coinpurse】Economist Alicia Garcia Herrero’s latest insights are here. She believes that the continued weakness of the yen has become a key driver for the Bank of Japan and the government to reach an agreement this month and decide on a rate hike. Although markets are still concerned about US tariffs and geopolitical risks, Japan’s economic performance has been surprisingly resilient.

So what’s the current issue? Inflation is still topping out. Short-term, medium-term, and long-term inflation expectations are all stuck above the Bank of Japan’s 2% target. Food prices are pushing core inflation upward, and the yen against the dollar is still weak around 155, which will inevitably increase imported inflationary pressures if it continues.

Garcia Herrero expects that the Bank of Japan will make a big move at the December 19th meeting—raising the policy rate by 25 basis points to 0.75%. Looking ahead, if the yen remains unstable after the rate hike and continues to drag down real incomes, the Japanese government is likely to tighten policy further. This could mean another 25 basis point rate increase early next year. The situation is somewhat like a row of dominoes, one after another.