Japan’s monetary policy is at a crossroads as the Bank of Japan (BOJ) navigates its normalization path amid persistent inflation and wage growth. Former central bank officials have cautioned against providing clear-cut estimates for the neutral interest rate—the level that neither stimulates nor cools growth—arguing such precision is difficult and potentially counterproductive. This “constructive ambiguity” approach comes as markets price in a December rate hike to 0.75%, with focus shifting to how far the BOJ can raise rates without hurting the economy.
As of December 17, 2025, the BOJ’s policy rate remains at 0.5%, with the neutral rate estimated in a wide 1%-2.5% range. Governor Kazuo Ueda has emphasized uncertainty in pinpointing the exact level, preferring data-dependent guidance over rigid targets. This SEO guide explores the debate, expert views, implications for 2026 hikes, and what it means for yen strength and global markets.
Why Neutral Rate Estimates Matter For Japan’s Policy Path
The neutral rate serves as a benchmark for how accommodative or restrictive policy is. With Japan’s real rates still deeply negative, the BOJ aims to gradually normalize without derailing growth.
Former officials highlight challenges:
- Estimation Difficulty — Factors like productivity, demographics, and global trends make precise calculations elusive.
- Counterproductive Clarity — Fixed targets could anchor expectations too rigidly, limiting flexibility.
- Wide Range Preference — Current 1%-2.5% band allows room for data-driven adjustments.
Ueda’s recent comments reinforce this: “The neutral rate can only be estimated within a fairly wide range.” Markets interpret this as signaling continued hikes but at a cautious pace.
Expert Views: Ambiguity Over Precision In 2025-2026
Former BOJ voices dominate the discussion:
- Seisaku Kameda (ex-top economist): Expects no detailed neutral rate guidance, predicting focus on broad range.
- Ayako Fujita (ex-official, JPMorgan): BOJ likely stresses 1% as lower bound, with actual possibly higher (around 1.5%).
- Eiji Maeda (ex-executive): Sees hikes to 1% by summer 2026, entering neutral territory slowly.
Current board member Junko Koeda advocates continued normalization to avoid distortions. Analysts like Yusuke Koshiyama note wage data will drive December decisions.
Consensus: BOJ avoids “end of cycle” signals, maintaining flexibility amid inflation above 2%.
Implications For Yen, Rates, And Markets in 2026
A December hike (90%+ priced) would bring rates to 0.75%, nearing the neutral lower bound. Key effects:
- Yen Strength — Higher rates support JPY, but ambiguity caps sharp appreciation.
- Bond Yields — 10-year JGBs near 18-year highs; rapid rises prompt flexible BOJ responses.
- Growth Risks — Too-fast hikes could hurt wage momentum; gradual path favored.
- Global Spillovers — Impacts carry trades and emerging market flows.
Forecasts: Median terminal rate ~1.0%-1.5% by end-2026, with 2-4 hikes possible.
What Traders Should Watch Next
- December 18-19 Meeting — Signals on pace and neutral guidance.
- Wage/Inflation Data — Spring shunto negotiations key for 2026 path.
- Yield Movements — Sharp JGB rises may trigger intervention.
Final Take: Constructive Ambiguity Wins For Now
Japan’s neutral rate debate underscores the BOJ’s cautious normalization—prioritizing flexibility over precision in 2025-2026. While hikes continue, ambiguity keeps markets guessing, supporting gradual yen gains without shock.
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