The Bank of Japan raises interest rates gradually, but the real interest rate remains low

【Chain News】The Bank of Japan’s actions next week are essentially a done deal. According to sources close to the decision-making level, the central bank will maintain its stance of continued rate hikes but will change its communication strategy—no longer emphasizing the target of rate increases, but instead flexibly explaining that subsequent steps will be adjusted according to economic reactions.

The market has already fully digested this logic. Governor Ueda and his team have signaled that a December rate hike is expected, with interest rates rising from 0.5% to 0.75%, and this expectation has been fully priced in. Now everyone is concerned about what level the central bank considers “neutral” for interest rates.

The new idea from the central bank is that, although they will update their estimates of the neutral interest rate internally, they don’t plan to use this estimate as the main reference for their rate hike roadmap due to the inherent uncertainty in forecasts. Instead, they will interpret it differently—each future rate hike depends on the effect of the previous one: how bank lending will change, whether corporate financing conditions can improve, and whether economic activity is truly being restrained.

Sources agree on one point: how low are Japan’s real interest rates right now? This means the BOJ has ample room to gradually and moderately proceed with rate hikes without any rush. In other words, this rate hike cycle is just beginning.