BoJ minutes show yen weakness and labour tightness are key inputs into the timing of further rate hikes.
Summary:
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BoJ debated yen weakness and labour shortages as inflation drivers
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December rate hike lifted policy rate to 0.75%
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Some members see inflation becoming more entrenched
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Weak yen viewed as feeding underlying inflation pressures
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No preset hiking path, but further tightening firmly on the table
Bank of Japan policymakers used their December meeting to debate how a weak yen and tightening labour conditions are increasingly shaping the timing of further interest rate hikes, according to minutes released Wednesday. The discussion reinforced the board’s readiness to continue normalising policy following December’s rate increase to 0.75%, the highest level in three decades.
Members broadly agreed that additional hikes would depend on how economic conditions and inflation forecasts evolve. While some favoured a cautious approach, others argued that inflation pressures were becoming more entrenched as firms continued to pass on higher wages and input costs, signalling reduced tolerance for prolonged policy accommodation.
The weak yen featured prominently in the debate. Several members noted that currency depreciation was adding to inflation by lifting import prices at a time when companies were already raising wages and prices. Although policymakers reiterated that exchange rates are not an explicit policy target, they acknowledged that yen moves can materially influence underlying inflation and therefore warrant consideration when assessing the need for further tightening.
Labour market dynamics also loomed large. Persistent labour shortages were seen as reinforcing wage growth and strengthening the transmission of cost pressures into prices. One member explicitly linked the yen’s depreciation and the rise in long-term yields to the policy rate being too low relative to inflation, arguing that timely rate hikes could help restrain future inflation and stabilise longer-term borrowing costs.
Currency developments have taken on political sensitivity as well, with yen weakness fuelling cost-of-living pressures ahead of Japan’s February general election. After briefly approaching 160 per dollar last week, the yen has rebounded sharply amid speculation of coordinated action by Japanese and U.S. authorities.
Looking ahead, most members opposed committing to a fixed timetable for further hikes, preferring flexibility. However, one suggested tightening at intervals of a few months given how far policy remains from neutral. Others stressed the importance of monitoring a broad set of indicators, including anecdotal evidence, to confirm whether a durable wage–price cycle is firmly in place.
