Will Japan raise interest rates in December? The market is closely watching the speech of the Bank of Japan Governor on Monday.

The market is focusing on the speech of Bank of Japan Governor Haruhiko Kuroda on Monday. According to Wind Trading Desk news, Nomura Securities research team explicitly stated in their latest weekly report on November 29 that the probability of a Bank of Japan rate hike in December has significantly increased from less than 20% last week to over 50%. The research report believes that behind this shift in expectations is a deep concern among Bank of Japan officials about the side effects of maintaining ultra-low real interest rates. Analysis points out that for investors, the speech of Bank of Japan Governor Haruhiko Kuroda in Nagoya on Monday (December 1) will be a decisive moment, as the market will seek the latest assessment on the prospects of spring wage negotiations and underlying inflation trends. The report emphasizes that while the USD/JPY has been trading around 156.50 levels this week, with the warming expectations of a December rate cut by the Federal Reserve, the yen's trend may experience a significant reversal. Sudden shift in market sentiment: Probability of December rate hike soars above 50% This week, trading in USD/JPY remained relatively calm, fluctuating narrowly around the 156.50 level, contrasting sharply with the attempt to break through 158 last week. However, beneath the calm surface, market pricing for a Bank of Japan rate hike in December has quietly undergone a dramatic change. Three key factors driving the shift in market expectations include: Collective hawkish turn by Bank of Japan officials. Following last week's moderate members Koizumi and Nemoto leaning towards a recent rate hike, policymaker Noguchi, who has long been seen as dovish, expressed concerns this week about the side effects of delaying policy normalization. Intensive media reporting sending signals. Jiji Press reported that continued weakness in the yen would support a Bank of Japan rate hike, as it could impact Japan's underlying inflation. It was reported that former Bank of Japan official Momii believed the probability of a December rate hike was "quite high". Wall Street News previously mentioned that Reuters pointed out that the Bank of Japan is preparing the market for a recent rate hike, as the impact of the weak yen has surpassed political factors. Decreased tolerance for weak yen by the Japanese government. Nomura Securities believes that given the current weak yen situation, the Japanese government's tolerance for further Bank of Japan rate hikes may have increased. As previously emphasized, the weak yen could be the "Achilles' heel" of the Japanese government, and Finance Minister Kato's verbal intervention has begun to show growing concerns about the depreciation of the yen. Side effects of Japan's long-term low real interest rates becoming increasingly evident The fundamental reason why members of the Bank of Japan Policy Board are increasingly inclined to raise rates again is because they believe that excessively low real interest rates may have adverse effects on the Japanese economy. Data shows that Japan's real interest rates are not only at the lowest level among major advanced economies, but also significantly lower than the Bank of Japan's estimate of the natural interest rate. This abnormally low level of real interest rates is one of the important factors encouraging markets to continue to be bearish on the yen. While the Ministry of Finance (MOF) is responsible for foreign exchange policy, Governor Haruhiko Kuroda and other officials are concerned that the impact of exchange rates on potential inflation may be even greater than in the past. Yen depreciation altering cost pass-through dynamics Unlike the deflationary period, Japanese companies have recently shown a stronger willingness to pass on rising input costs to final selling prices, as highlighted by the Bank of Japan in its October analysis. In this scenario, the pass-through effect of exchange rate could be larger than estimated using long-term samples. This is also reflected in the recent steeper slope of the Japanese Phillips curve. According to Wall Street News, the latest data confirms this. The Producer Price Index (PPI) for services in October showed that the inflation rate in labor-intensive industries remained high in the 3% range. General service sector CPI inflation, excluding volatile items, also remained stable at around 2%. Nomura believes that for the Bank of Japan, the risk is that if nominal rates (currently at 0.50%) remain too low for too long, it could lead to higher inflation through channels such as yen depreciation, ultimately leading to further decline in real interest rates and forming a vicious cycle. The report emphasizes that this is the concern of policymakers. Two key points to watch for in Kuroda's speech next Monday Against the backdrop of continued signals from Bank of Japan officials, Governor Haruhiko Kuroda is scheduled to make a speech on December 1. Nomura Securities focuses on two main points: Firstly, the latest evaluation of spring wage negotiations. This was a key phrase used by Kuroda in a press conference after the October meeting, and relevant comments are crucial in determining the timing of the next Bank of Japan rate hike. Since Kuroda's speech will be held in Nagoya, a hub for the automotive industry, he may receive the latest information from key executives in Japan's core automotive industry. If he makes positive comments on spring wage increases, the market is likely to interpret it as a hint of a rate hike in December. Secondly, the latest view on Japan's underlying inflation. As of mid-November, Kuroda assessed Japan's underlying inflation as "gradually rising towards 2%". However, Policy Board member Koizumi recently stated that underlying inflation is "around 2%", indicating a difference in views. If Kuroda raises his assessment of underlying inflation (i.e. implying it is closer to 2% than previously thought), the market will see this as a hawkish statement. This article is reprinted from "Wall Street News", author: Bai Yilong; GMTEight Editor: Liu Jiayin.