The Bank of japan is preparing for another interest rate hike, but what has the market speculating is at what pace and for how long the central bank will raise the still low borrowing costs.

Here are the Bank of japan's recent communication guidelines regarding the potential timing and extent of the final interest rate hike:

1. What has the Bank of japan said and done so far?

The Bank of japan ended its negative interest rate policy in March and raised its short-term policy target level to 0.25% in July. Bank of japan Governor Kazuo Ueda stated on November 18 that the economy is moving towards sustained wage-driven inflation, which is the latest sign that another interest rate hike is imminent.

Ueda also discussed the benefits of timely interest rate hikes, stating that raising borrowing costs from extremely low levels would help achieve long-term economic growth.

This wording is similar to that used by the Bank of japan during its last rate hike cycle in 2007. At that time, then Bank of japan Governor Toshihiko Fukui stated that a gradual exit from stimulus measures at an early stage would help prevent bubbles, thereby achieving stable and sustained economic growth.

Under Fukui's leadership, the Bank of japan raised interest rates twice from zero to 0.5% in February 2007. However, the following year, in response to the global financial crisis, the central bank was forced to re-enter a rate-cutting cycle. Interest rates remained near zero for the next 16 years.

When is the next time the central bank of japan is likely to raise interest rates?

Ueda believes that wages will continue to rise and promote consumer spending, which will lead companies to continue raising prices, thereby meeting the prerequisites for further interest rate hikes.

While warning about uncertainties in the usa economy and market volatility, Ueda stated that the central bank of japan does not necessarily have to wait for all these risks to disappear, indicating an openness to raising rates again at the next meeting on December 18-19.

The policymakers at the central bank of japan will not commit to a preset timing for the next interest rate hike, but they believe that market expectations of a rate increase to 0.5% by the end of March are manageable.

Where do policymakers at the central bank of japan view the neutral interest rate?

If the economy continues to recover, the central bank of japan will continue to raise its short-term policy rate toward japan's neutral interest rate, which is the level at which monetary policy neither contracts nor expands.

Although inflation has hovered around 2% for more than two years, the central bank of japan has maintained the short-term rate at 0.25%, meaning that the real borrowing costs adjusted for inflation remain very low.

By raising borrowing costs to a level regarded as neutral for the economy, the central bank of japan can remove what it considers excessive monetary stimulus measures.

However, due to different models producing different results, estimating the unobservable neutral rate is not easy. Major central banks use the neutral rate as a benchmark, but they warn not to overly rely on it when implementing monetary policy.

The staff of the Bank of Japan estimate using different models that Japan's inflation-adjusted real neutral rate is in the range of -1% to +0.5%. This means that if inflation reaches the Bank of Japan's target level of 2%, the bank could raise its short-term interest rates to around 1% without cooling economic growth.

According to the current forecast from October, the Bank of Japan expects that short-term interest rates will approach what it considers the neutral level in the "second half of the three-year forecast period" ending in March 2027, which means sometime after October 2025.

Although Bank of Japan Governing Board member Naoki Tamura stated in September that the bank must increase interest rates to at least 1% at the earliest by the end of next year, his colleagues remained silent on the level of the neutral rate. Although Bank of Japan Governing Board member Naoki Tamura stated in September that the bank must increase interest rates to at least 1% at the earliest by the end of next year, his colleagues remained silent on the level of the neutral rate. Governor Ueda has indicated that it is difficult to make credible estimates due to a lack of data, as Japan's interest rates have long remained at zero.

4. What are the key trigger factors that need to be noted?

Aside from the neutral rate, the movement of the yen will have a significant impact on the timing of the Bank of Japan's interest rate increases. A weak yen was a factor that prompted the Bank of Japan to raise rates in July, as it raised import costs and broader inflation.

The uncertainty surrounding the economic policies of USA President-elect Trump has also complicated the Bank of Japan's decisions. The uncertainty surrounding the economic policies of USA President-elect Trump has also complicated the Bank of Japan's decisions. Many of his policies are believed to lead to inflation, which may prevent the Federal Reserve from cutting rates too much, keeping the yen weak against the dollar.

5. When might the Bank of Japan provide more hints?

The October CPI, which will be announced on November 22, will be closely monitored for clues on whether companies are passing on rising labor costs through increased service prices.

Nakamura Toyoshi, a moderate member of the Bank of japan's board, is cautious about overly rapid interest rate hikes. He will give a speech and hold a press conference on December 5.

The Bank of japan will release its quarterly business survey 'Tankan' on December 13. If the data shows strengthening business confidence, capital expenditure plans, and corporate inflation expectations, the chances of a rate hike in December may increase.