Ueda’s Remarks Jolt Japan’s Markets

Financial markets grew increasingly uneasy this week after Bank of Japan Governor Kazuo Ueda’s latest remarks reignited expectations of a possible rate hike in December.

Speaking to business leaders in Nagoya, Ueda said the central bank would “consider the pros and cons” of raising rates and respond “as appropriate.” The statement was measured, yet firmer than his usual tone, and investors quickly interpreted it as an early indication that Japan may be preparing to pull away from its long-standing ultra-easy stance.

Ueda-Takaichi Talks Add Fuel to Speculation

Also unsettling markets was Ueda’s reference to recent discussions with Japan’s new prime minister, Sanae Takaichi. Although Takaichi has a reputation for hawkish foreign-policy views, she has historically supported softer monetary settings. Ueda described their exchanges as “frank” and “good,” a comment that suggested clear communication but also hinted at evolving alignment between the government and the central bank. Traders read the remark as another sign that a policy shift may be gaining political backing.

Leadership Challenges Rise

Takaichi inherits a complex backdrop. Japan spent years trying to nudge inflation higher, achieving meaningful progress only after global shocks, the pandemic, and the war in Ukraine, lifted prices worldwide. With households still feeling the impact of rising living costs, she cannot risk being associated with another inflation spike. At the same time, she must balance conservative political support with economic pressures that demand careful policy coordination.

Economic Trade-Offs Remain Front and Center

Economists caution that a rate hike could produce conflicting effects. On one hand, higher rates may slow the yen’s weakness and reduce inflation imported through currency channels. On the other hand, tighter monetary conditions run counter to Takaichi’s fiscal approach, which relies on subsidies and spending plans to support consumers. When fiscal and monetary forces move in opposite directions, the final impact on inflation becomes harder to predict, and risks to economic momentum increase.

Despite Ueda’s attempts to signal restraint, markets continue to interpret the BoJ’s communication as pointing toward tightening. Interest-rate swaps now place the probability of a December rate hike between 75% and 90%. With the next BoJ meeting approaching, Japanese markets are likely to remain sensitive, and volatility is expected to stay high.

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