The Bank of Japan is set to announce its final interest rate decision of the year this Friday. Market expectations have basically become a consensus—despite some reservations about tariff pressures and internal voices, the central bank is still expected to continue raising interest rates and signal further tightening ahead.

This will be the second rate hike by the Bank of Japan this year, pushing the policy rate to its highest level in thirty years. Although the post-hike interest rate level remains relatively low on a global scale, for the Japanese market, which has been immersed in ultra-low interest rates for a long time, Governor Ueda and his team’s move toward normalization is highly significant.

**Rate hike is almost certain; inflation and wages are the two key factors**

At this point, a rate hike by the central bank is almost a done deal. There are two solid supports behind this.

On one hand, inflationary pressures remain persistent. Food prices in Japan have been high, with inflation rates exceeding the 2% target set by the central bank for nearly four consecutive years. Under these circumstances, the market generally expects the central bank to raise short-term interest rates from 0.5% directly to 0.75% at the Friday meeting.

On the other hand, the preconditions for a rate hike are now met. Central bank officials have repeatedly emphasized that they need to see "sustained inflation accompanied by strong wage growth" before considering raising borrowing costs. Data from the recent PMI survey released this Monday shows that, due to worsening labor shortages, most of the central bank’s branches expect companies to continue significant wage increases next year. This provides strong support for a rate hike.

**The government is also not standing in the way**

Interestingly, the Japanese government seems to have given the green light for this decision. Although Prime Minister Sanae Takaichi initially leaned toward easing policies, Finance Minister Shunichi Suzuki signaled this Tuesday that there is room and necessity for policy adjustments. Against this backdrop, the central bank’s decision to hike rates faces even fewer concerns.