Rate hike bets in Japan mount as BOJ's Ueda sends strongest signal yet

[Bank of Japan Governor Kazuo Ueda Speaks To Parliament Committee]
Tomohiro Ohsumi

Bank of Japan Governor Kazuo Ueda has given the strongest signal yet that the central bank may resume interest rate hikes later this month, pushing the yen and bond yields higher on Monday.

Ueda said the BOJ will "consider the pros and cons of raising the policy interest rate and make decisions as appropriate," in light of the improvement in economic activity and prices.

He noted that the uncertainties surrounding U.S. tariff policies are receding, and the likelihood of the BOJ's economic and price projections being met is gradually increasing.

As for Japan's economy, Ueda said the contraction [https://seekingalpha.com/news/4522722-japans-economy-contracts-04-qq-in-q3-but-beats-forecasts] seen in the July-September quarter will be only temporary and positive growth is expected to return.

"For the time being, Japan's economic growth is likely to be modest… Thereafter, however, Japan's economic growth rate is likely to rise," he added.

Ueda's remarks lifted the yen (JPY:USD [https://seekingalpha.com/symbol/JPY:USD]), while the 2-year yield - the most sensitive to policy expectations - rose to its highest level since 2008.

"Aside from explicitly saying the BOJ is considering the pros and cons of a hike, he hinted that there is no clear opposition by new Prime Minister Sanae Takaichi to raising rates," said Francesco Pesole, FX strategist at ING.

"This second factor had been crucial for markets, whose basic understanding was that Takaichi was a dovish-leaning influence," he added.

Market participants are now increasingly betting on the BOJ raising its policy rate to 0.75% at its Dec. 18-19 meeting, with the odds currently at about 80%.

The last rate hike was in January, when the BOJ raised the rate by 25 bps to 0.5% - the highest level in 17 years.

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