MNI INTERVIEW: Yen To Drive BOJ's Dec Hike Decision - Momma

A weaker yen approaching JPY160 to the U.S. dollar will prompt the Bank of Japan to raise its 0.5% policy rate at the Dec. 18-19 board meeting, a former BOJ chief economist told MNI, noting that policymakers are prepared to implement the hike either at that meeting or in January.

“If the dollar strengthens to around JPY160 before the policy-setting meeting, the rate hike in December will be certain,” said Kazuo Momma, former BOJ executive director in charge of monetary policy and now executive economist at Mizuho Research and Technology, reiterating the yen level he proposed in August. (See MNI INTERVIEW: Ex-BOJ's Momma Sees Jan Hike Likelihood)

A JPY160 level would intensify media pressure and could erode Prime Minister Sanae Takaichi’s approval rating, raising the urgency of action, he argued. In this context, the BOJ would need to ensure public and government understanding of its policy decisions, he added. “The weak yen is a big risk. But a rate hike that isn’t understood by the public is unfavourable. The rate hike amid a strong weak-yen momentum is the most understandable rate hike,” Momma said.

The yen was trading at JPY155 during Wednesday afternoon Asia trading, down from its JPY157 level reached last week.  

Momma noted communication between the BOJ and the government is smooth, with no signs that politicians are attempting to restrain a rate hike, adding both sides share the view that the weak yen has clear disadvantages. He said that it is difficult for the government to intervene in foreign exchange markets before the BOJ raises rates, as the weak yen is primarily driven by the BOJ’s slow pace of normalisation.

The current 0.50% policy rate is extremely low given underlying inflation near 2%, he argued, adding even a move to 0.75% would not cause significant macroeconomic damage. Underlying CPI inflation is approaching the 2% target and is expected to converge with the real CPI around 2% next year, making it easier for the BOJ to explain its stance, though policy decisions will continue to be guided by underlying inflation, he added.

However, the BOJ would likely signal a hike in advance to prepare markets, which currently only assign a 41% chance of a move higher next month, Momma noted, pointing to Governor Kazuo Ueda’s speech in Nagoya on Monday. (See MNI POLICY: Ueda Dec 1 Speech Crucial For BOJ Hike Timing) While Momma expects Ueda to offer nuance, he doubts the governor will provide explicit guidance on timing. Ueda will also have opportunities to signal policy intentions in upcoming Diet testimony before the December meeting, Momma added. 

BOJ FOCUS

The BOJ must assess whether new risks materialise, such as a stronger-than-expected tariff impact or a collapse in the AI boom, Momma said, although Ueda has noted that downside risks to the U.S. economy have eased somewhat.

On wages, Momma believes the BOJ is confident that fiscal 2026 wage growth will be around 4.5%, supported by strong corporate profits and labour shortages. If the BOJ wants to avoid unnecessary risk, it may choose not to raise rates in December and instead wait for corporate wage guidance early next year and reports at the branch managers’ meeting in mid-January, he concluded.