Minutes of the Bank of Japan meeting suggest that the rate hike is far from over: actual interest rates are "world's lowest level".

Some members of the Bank of Japan's Monetary Policy Committee expressed at an interest rate meeting earlier this month (when the Bank of Japan raised the benchmark interest rate) that Japan's real interest rates are still very low, implying that domestic borrowing costs in Japan may be further increased in the future. According to a summary of internal discussions released on Monday, during the two-day monetary policy meeting that ended on December 19, one of the nine members of the committee stated, "Japan's real policy interest rate is one of the lowest in the world, or even one of the lowest in a cliff-like manner." The member stated that the adjustment of the Bank of Japan's monetary easing is appropriate and mentioned the impact of exchange rate movements on prices. At the interest rate meeting, the Bank of Japan's Monetary Policy Committee raised the benchmark interest rate to 0.75%, the highest policy interest rate level in 30 years. The release of this summary comes as seasoned financial market traders have been looking for clues to determine how quickly the Bank of Japan's next interest rate hike might be. The minutes show that one policymaker suggested that the Bank of Japan should adjust its policies at intervals of several months in the short term, a pace broadly consistent with the median expectations of Bank of Japan watchers. Economists in a survey generally indicated that they expected the Bank of Japan to announce another rate hike in about six months, with many economists believing that the terminal rate for this rate hike cycle would be 1.5%. Former Bank of Japan Executive Committee member Hideaki Amakawa stated earlier this month that the Bank of Japan may raise the policy rate to a maximum of 1.50% by early 2027. Overall, the minutes of the Bank of Japan's monetary policy meeting released on Monday clearly indicate that the policy interest rate of the Bank of Japan has not yet reached a neutral level. One member pointed out, "It can be said that there is still a considerable distance to go before reaching the neutral interest rate level." At a press conference following the monetary policy decision on December 19, Bank of Japan Governor Kikuo Iwata stated that it is difficult to precisely define this level - the policy rate that is neither considered stimulatory nor restrictive, known as the neutral rate. A Bank of Japan study indicated that the neutral rate could be within a wide range of 1% to 2.5%, and multiple committee members of the Bank of Japan declined to provide a more precise range in interviews. The summary also shows that some members of the Monetary Policy Committee expressed concern about the continued weakening of the yen, which was likely one of the core considerations before the Bank of Japan's policy action on December 19. However, the summary indicates that the yen was mentioned only once in discussions this month. In contrast, the yen was mentioned seven times in the meeting minutes before the Bank of Japan's previous rate hike in January. Before the meeting this month, the yen fell to its weakest level in about 10 months, and the USD/JPY exchange rate even approached the important level of 160 - a level where Japanese financial authorities had intervened in the foreign exchange market in the past. Despite policy actions taken by both the Bank of Japan and the Federal Reserve, the spread between U.S. and Japanese interest rates narrowed, the yen remained weak, prompting Japanese financial authorities to strengthen verbal warnings about excessive market volatility. The summary also shows that the government led by Prime Minister Takanori Koshi, while not opposing the Bank of Japan's latest rate hike, remained cautious. A cabinet official stated at the meeting, "We must closely monitor the future development of factors such as fixed investment by companies and corporate profits." Koshi is a staunch supporter of loose monetary policy, having taken office as prime minister in October. Her appointment raised doubts about whether Bank of Japan under Iwata could continue its normalization policy, but the political cost of inflation and yen depreciation is believed to have limited Koshi's resistance to normalizing Japan's monetary policy. Before the action earlier this month, the market had largely priced in this rate hike measure, as Iwata had previously stated in a preview before the December monetary policy decision that the conditions for reducing monetary easing were gradually falling into place. For the Japanese government bond market, which has become increasingly hot as the Bank of Japan counter-trend towards a rate hike cycle amid the global "interest rate cut frenzy", expectations of rate hikes and Japan's stimulative fiscal policy have relentlessly driven up long-damaged Japanese bond yields since the Abe era. Japanese government bond yields, especially for 20, 30, and 40-year long-term bonds, have repeatedly hit historic highs, the main logic behind which is markedly different from the U.S. and European markets, mainly due to the continued rise in expectations of a Bank of Japan rate hike and the gigantic incremental stimulus plan of Prime Minister Takanori Koshi's government totaling one trillion yen, which has caused a terrifying "term premium" from the United States to sweep across Japan, overall sweeping across the Japanese stock, bond, and foreign exchange markets. Ultimately, this year's Japanese bond yields have collectively soared, while the yen exchange rate has continued to depreciate. The latest market news shows that Bank of Japan Governor Kikuo Iwata has expressed growing confidence in the Bank of Japan's ability to achieve sustainable price growth, implying that further rate hikes may be possible next year; Japanese Prime Minister Takanori Koshi stated on Thursday that the budget for the fiscal year starting in April 2026 would be approximately 122.3 trillion yen (about 786 billion U.S. dollars), an increase of about 6.3% from the 115.2 trillion yen already allocated this fiscal year, with spending growth even exceeding the inflation rate, marking the largest initial budget record in history. Given Japan's status as the most heavily indebted among developed economies, such a scale of fiscal spending is expected to further push up long-term government bond yields, which have been soaring since the beginning of this year.