On December 25, Bank of Japan (BOJ) Governor Kazuo Ueda reiterated that the central bank must closely monitor various risks, but he did not hint at the possibility of a rate hike in the coming monthHis comments came at a commercial meeting in Tokyo, where he stressed that the timing and pace of adjustments to monetary easing would depend on developments in economic activity, prices, and future financial conditionsThis statement was followed by a further depreciation of the Japanese yen against the US dollar.

Ueda emphasized that Japan’s economy is currently in a position where stable and sustainable achievement of the 2% inflation target is foreseeableHowever, he cautioned against returning to a deflationary or low-inflation environmentIn order to support the economy during the transition towards achieving sustainable 2% inflation, the BOJ will keep policy rates below neutral levels, he noted

The Governor also mentioned that the prices of a broad range of goods and services are rising due to wage growth, and he expects that by 2025, this virtuous cycle will be strengthened, allowing Japan to further approach its inflation target in a stable and sustainable manner.

Ueda acknowledged the positive impact of the extensive monetary easing measures on the Japanese economy but warned that new side effects could arise as a result of these policies, with negative impacts potentially becoming more pronouncedHe made it clear that any further adjustments to the monetary support policy will depend on the prevailing economic, price, and financial conditions at the time.

If the economy and prices continue to improve, Ueda stated, the BOJ will need to raise interest rates accordinglyAlthough economic and price conditions are improving, maintaining the current low rates for too long could lead to an overly accommodative monetary policy

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If the policy becomes too loose, the BOJ may be forced to raise rates rapidly, which could have a detrimental effect on sustainable economic growth.

The Governor emphasized the need for the BOJ to closely monitor wage developments at small businesses across the country, as large corporations must ensure that their substantial profits are shared with small businesses and households to achieve a virtuous cycle in the Japanese economyIn addition, Ueda highlighted the high uncertainty surrounding the global economic outlook, particularly the economic policies of the incoming US administration, which could have a significant impact on the global economy and financial marketsAs a result, he stressed the need to carefully examine the effects these developments may have on Japan’s economy and prices.

At the BOJ's policy meeting in December, the benchmark interest rate was left unchanged at 0.25%, marking the third consecutive pause in rate hikes

During a press conference, Ueda explained that, given the current high level of uncertainty, the BOJ had decided not to rush into further rate hikes and would continue to observe the impact of economic policies on the global economy, especially Japan, as well as the sustainability of domestic wage growth and price trends.

Recent authoritative data from Japan showed a 2.7% year-on-year increase in the consumer price index (CPI) in November, excluding fresh food, surpassing economists' expectations of a 2.6% rise and significantly higher than the 2.3% recorded in OctoberThis upward trend in Japan's domestic inflation should theoretically strengthen the BOJ's confidence in the economic outlook, reinforcing the case for a potential rate hike in the coming months. 

Economist Tohau Yu pointed out that the overall rise in inflation was mainly driven by the gradual removal of electricity and gas subsidies, which have been a key factor in pushing up energy prices

However, attention will shift to the government's plans to update energy subsidies in the supplementary budget to be proposed next yearThis initiative is expected to have a mitigating effect on energy-related inflation.

On Friday, the BOJ is set to release the minutes from its most recent policy meetingThese minutes may provide further details on the hawkish proposal for a rate hike by board member Naoki Tamura, which could potentially support the yenHowever, if the minutes emphasize the necessity for caution, the yen could experience further declines. 

In recent years, Japan has faced significant challenges in navigating the complex dynamics of monetary policyDespite having one of the world’s largest economies, Japan’s struggle with low inflation and sluggish growth has been well-documentedThe BOJ has maintained ultra-loose monetary policy for several years in an attempt to stimulate the economy, yet inflation has remained persistently below its target, and wage growth has been sluggish

The decision to maintain a low interest rate environment was designed to boost consumer spending and business investment, hoping that it would lead to inflationary pressures and, ultimately, a self-sustaining economic recovery.

However, this policy approach has had mixed resultsWhile the BOJ's monetary easing has led to some economic growth and financial stability, critics argue that it has not been enough to spark the kind of sustained inflation needed to reach the 2% targetAt the same time, Japan’s reliance on external factors, such as global commodity prices and changes in the US economy, has left it vulnerable to inflationary pressures that it cannot fully control.

The recent inflationary uptick, largely driven by energy costs, has put the BOJ in a delicate positionOn the one hand, inflation is higher than it has been in years, which could give the central bank room to tighten policy and address concerns about overheating or excessive risk-taking in the financial system

On the other hand, rapid increases in interest rates could undermine the fragile economic recovery and hurt households and businesses already struggling with higher living costs.

The central bank’s ability to balance these competing factors will be crucial to its ability to foster sustainable economic growth in the coming yearsIn particular, Ueda's focus on small businesses and wage growth as a key driver of a virtuous cycle is seen as an important development in Japan’s economic strategyAs Japan's economy continues to evolve, the BOJ's policies will remain under close scrutiny, as they will have a significant impact not only on Japan’s own economic health but also on global financial markets.

As the global economy faces increasing uncertainty—exacerbated by geopolitical tensions, shifting trade relationships, and the evolving economic policies of major players such as the United States—the outlook for Japan remains complex

While the BOJ’s cautious stance may seem prudent in light of these challenges, it also highlights the ongoing struggle for Japan to break free from years of stagnationThe coming months will be critical in determining whether the central bank’s policies will succeed in guiding Japan to a stable, inflationary environment without derailing the recovery. 

In this context, all eyes will be on the BOJ's next moves, especially as it contemplates the appropriate timing for any future rate hikesIf inflation continues to rise, and if economic growth shows signs of sustainability, the BOJ may have little choice but to tighten policy in order to maintain its credibility and to meet its inflation targetHowever, such a decision would need to be weighed carefully against the risk of undermining Japan's fragile recovery, especially as global economic uncertainties continue to shape the economic landscape.