Japan's CB locks in near-term rate hike and yen may sway timing

The Bank of Japan's (BOJ's) cautious governor has dropped unusually hawkish hints of an interest rate hike in December or January next year, with the timing likely swayed not just by wage momentum but by moves in the yen.

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The central bank kept interest rates steady at 0.5 per cent on Thursday as expected, but Governor Kazuo Ueda said the likelihood of its baseline scenario materialising has heightened language he had used in the past to signal a rate hike was imminent.

While warning of lingering global uncertainties, the board revised up this year's growth forecast and made few tweaks to its sanguine view of Japan's recovery prospects in a quarterly report released after the meeting.

As was the case before the BOJ's previous rate hike in January, Ueda also elaborated on the triggers for action with an emphasis on the "initial momentum" of next year's wage negotiations.

"Ueda's remarks... contained many signals that, barring major shocks in the US economy or markets, the probability of a near-term rate hike is rising," said Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG Securities.

"Given Ueda's use of the term 'initial momentum,' we think it is unlikely the Bank of Japan will wait until March wage results," said Yamaguchi, who predicts a rate hike in December.