The central bank "takes turns smashing the market," after the Federal Reserve, will the Bank of Japan intervene? Will Japan raise interest rates in December?

Following the contradictory policy communications from the Federal Reserve that stirred the market, the Bank of Japan has taken over the "baton," with Kazuo Ueda's remarks sharply raising market expectations for a rate hike in December.

On December 1st, Bank of Japan Governor Kazuo Ueda, in a rare speech, directly mentioned the upcoming monetary policy meeting scheduled for December 18-19, stating that a decision would be made "at our discretion." This statement was seen by investment banks as a strong signal, significantly increasing the likelihood of a rate hike this month.

The market reacted immediately, with the probability of a rate hike by the Bank of Japan in December skyrocketing from 20% ten days ago to 80%. Previously, the Federal Reserve's chaotic communications had reduced the likelihood of a rate cut in December from 80% to 30%, before raising it back to 100%.

Japanese government bond yields surged to recent highs, and the narrowing of the USD/JPY interest rate differential led to a decline in the dollar against the yen. Meanwhile, the price of Bitcoin, a barometer for "carry trades," almost erased its gains from the past ten days within hours. The market is concerned that if the Bank of Japan unexpectedly raises rates just before Christmas amid year-end liquidity constraints, it could trigger a market shock similar to that of December 2022, reminiscent of the "carry trade massacre."

Now, there is a clear divergence on Wall Street regarding the Bank of Japan's actions in December. According to trading desks, Morgan Stanley stated in its latest report that considering the uniqueness of Ueda's remarks and the decreasing uncertainty in the U.S. economy, a rate hike in December has become the bank's "baseline scenario"; while Goldman Sachs remains cautious, believing the Bank of Japan may still need to wait for more corporate wage data, making action in January a high probability event.

Kazuo Ueda's "Rare" Statement

The direct catalyst for this dramatic shift in market expectations was Ueda's remarks during a meeting with business leaders in Nagoya. According to Morgan Stanley's analysis, it is "extremely unusual" for a central bank governor to directly point out the next specific meeting and hint at a possible decision in a routine speech.

Ueda clearly stated in his speech: "Considering the next monetary policy meeting on December 18 and 19, our bank is actively collecting information on corporate wage positions through headquarters and branches... At that time, we will review and discuss domestic and international economic activities, prices, and financial market dynamics, and consider the pros and cons of a rate hike, making a decision at our discretion."

Morgan Stanley believes this wording clearly places the December meeting under the spotlight of policy decision-making, greatly increasing the likelihood of a rate hike this month, and has already incorporated it into their baseline scenario forecast. The bank had previously viewed a December rate hike as a risk scenario, but after the October meeting, it has shifted to the most likely baseline forecast In addition, Kazuo Ueda's assessment of the external environment is also more optimistic. He pointed out that the uncertainty surrounding the U.S. economy has decreased, especially with the risk of a federal government shutdown being lifted and the uncertainty of tariff policies diminishing. He believes that although the U.S. tariff policy towards Japan was a major concern, the direct impact on Japanese corporate profits may be limited at present, and the overall downside risk to the U.S. economy has eased.

Positive Signals for Interest Rate Hikes

Kazuo Ueda's remarks not only convey signals in wording but also provide multiple arguments for interest rate hikes. He believes that the "confidence in achieving its economic outlook is gradually strengthening," and the conditions for normalizing policies are improving.

First, regarding wage growth, which is the most important prerequisite for interest rate hikes, Ueda believes that the "initial momentum" of wage negotiations next spring is improving. He cited several positive factors: the Japanese Trade Union Confederation maintains a wage increase target of 5% or higher; the Japan Business Federation's stance on wage increases has upgraded from last year's "anchoring" to "further anchoring"; and corporate surveys show that many companies plan to maintain or exceed this year's wage increase.

Second, regarding recent data, Ueda expressed an optimistic attitude. He believes that the negative growth in real GDP in the third quarter of 2025 is merely "temporary," a technical adjustment caused by the front-loading effect of exports. After excluding fluctuations, the economy is still recovering moderately. At the same time, he pointed out that the uncertainty of the U.S. economy has decreased, and the downside risks for the Japanese economy have weakened.

Finally, regarding inflation, Ueda stated that the transmission of wages to sales prices is still ongoing, and the distribution pattern of price increases "is beginning to resemble the situation in the first half of the 1990s," when Japan's average annual inflation rate was about 2%. This suggests that the nature of potential inflation trends may be undergoing a lasting change.

Will There Be a Rate Hike in December? Wall Street is Divided

Morgan Stanley has clearly stated that its long-held "non-consensus" forecast—namely, a rate hike in December—is becoming the market consensus. The bank pointed out that previously, due to the OIS market pricing dropping below 20%, many economists postponed their forecasts to January next year or even October next year.

However, with the continued depreciation of the yen and a series of political and regulatory interactions—including the meeting between Prime Minister Sanae Takaichi and Ueda on November 18, as well as hawkish remarks from policy committee members Koeda and Masu—the market sentiment has changed.

Morgan Stanley believes that if there are no sudden changes in the market and uncertainty does not significantly increase before the December meeting, the likelihood of the Bank of Japan raising interest rates this month is very high. The bank believes that the next short-term economic outlook survey (to be released on December 15) will further confirm the employment and corporate profit situation, providing data support for the policy meeting three days later.

In contrast, Goldman Sachs takes a cautious stance on December actions. According to a report by Goldman Sachs economist Akira Otani, although Ueda's remarks are "further" than those after the October meeting, a rate hike in December is not a certainty.

Goldman's core logic lies in the availability of data. The report points out that the management of large Japanese companies typically announces next year's wage policies through "Shunto" from the end of the year to early next year. Therefore, Goldman believes that the central bank may not have sufficient information on wage increases by the time of the meeting on December 18-19 In comparison, at the meeting in January 2026, the central bank will have more reports and survey results from branch managers.

Goldman Sachs maintains its baseline forecast for an interest rate hike in January 2026, but also acknowledges that if the yen weakens further, or if more companies announce salary increases early to attract talent, the probability of a rate hike in December will rise. Goldman Sachs points out that Kazuo Ueda's speech clearly links the timing of the next rate hike to the collection of information on "corporate wage-setting positions," and the central bank will ultimately make a judgment after obtaining more concrete data.

The Risk of Carry Trade Resurfaces

The market's fear of a rate hike in December stems not only from the interest rates themselves but also from the timing.

The current market environment shows a serious disconnect between the central bank's communication and market expectations. According to relevant market analysis, the Federal Reserve's previous chaotic communication has left the market confused, while the Bank of Japan has seen the probability of a rate hike soar from 20% to over 80% in just ten days, further exacerbating market fragility.

(Federal Reserve interest rate cut probability trend)

For global traders, this awakens painful memories of Christmas 2022. At that time, the Bank of Japan also unexpectedly adjusted its yield curve control (YCC) policy at the December meeting, raising the upper limit of the 10-year government bond yield from 0.25% to 0.5%, triggering severe turmoil in global markets.

Jim Reid from Deutsche Bank warns that history may have striking similarities. The current market reaction has already shown signs of stress: as the U.S.-Japan interest rate differential fluctuates, cryptocurrency assets like Bitcoin have rapidly declined, seen as an early signal of carry trade unwinding. Considering that December 19 falls just before the Christmas holiday, market liquidity is typically at an annual low, and any unexpected tightening of policy could be amplified in a weak liquidity environment, triggering a new round of "carry trade disasters."