Bank of Japan hike priced, forward guidance in focus - preview for Friday, December 19

Market Impact and Expectations Ahead of BoJ Meeting

The Bank of Japan is widely expected to enact a 25bp rate hike at its meeting on December 19, with the move almost fully priced in by markets. Consequently, investor attention will shift to Governor Kazuo Ueda's press conference, where guidance on the pace and parameters of future policy normalization is expected. Even after the anticipated increase, Japan's nominal interest rates are still firmly negative, which underscores a broadly accommodative stance. The impact of rates on corporate financing, bank lending, household consumption, and capital expenditures will play a crucial role in future policy decisions. Factors such as spring wage negotiations and the yen's exchange rate will significantly influence assessments moving forward. Further, policymakers have reignited discussions surrounding the neutral rate, with a focus on a conceptual range rather than a precise target. This suggests that the pace of tightening will proceed cautiously without any urgency.

Market Reactions and Future Outlook

Given the full pricing of this rate hike, the risk of volatility is considered low. Unlike previous rate hikes that triggered dramatic market reactions, the yen's response is expected to depend more on the forward guidance provided by the BoJ. Looking further ahead, some strategists predict additional hikes could be penciled in for Q3 2026, potentially creating upside risks for the yen as divergence between BoJ and Fed policies increases.