Japan Nears 30-Year Rate High as BOJ Balances Inflation Control Against Economic Fragility

Economic

Forex

Summary:

The Bank of Japan is expected to raise interest rates to 0.75%, the highest since 1995, in a bold move to control inflation and stabilize the yen....

BOJ Approaches Milestone Amid Economic Headwinds

As 2025 draws to a close, the Bank of Japan is widely expected to raise its benchmark interest rate to 0.75%, marking a historic shift after decades of ultra-loose policy. Data from LSEG indicates an 86.4% market probability that this decision will be made at the year’s final monetary policy meeting, ending Friday. If confirmed, it would represent the highest policy rate since 1995, formally breaking away from Japan’s negative interest rate era that began in 2016.

While the move is positioned as a necessary step toward monetary normalization, the decision comes at a time when Japan’s economic performance is showing significant weakness. The revised GDP data for Q3 2025 confirmed a sharper-than-expected contraction: a quarterly drop of 0.6% and an annualized fall of 2.3%. This downturn creates a fragile backdrop for a rate hike, suggesting the central bank is prioritizing structural monetary reforms over short-term growth support.

Inflation and Currency Dynamics Drive Policy Decisions

The principal motivation behind the BOJ’s rate hike is persistent inflation. Consumer prices have exceeded the BOJ’s 2% target for 43 consecutive months, weakening the credibility of its previous dovish stance. A higher interest rate is expected to help strengthen the yen against the U.S. dollar, potentially slowing imported inflation and relieving pressure on consumers. The yen has traded between 154 and 157 per dollar since November, reflecting ongoing depreciation that intensified after the October appointment of Prime Minister Sanae Takaichi, a known supporter of loose monetary policy.

The relationship between rate increases and currency appreciation is based on the interest rate differential between Japan and its global counterparts, particularly the United States. As U.S. rates stabilize or decline, Japan’s upward adjustments reduce this differential, attracting capital inflows and bolstering the yen. However, the real impact will depend on the BOJ’s communication, especially any indication of a policy ceiling or “terminal rate.”

Markets Focus on Neutral Rate Guidance

Investors are increasingly focused not just on whether the BOJ will raise rates, but how far and how fast it intends to go. Governor Kazuo Ueda acknowledged earlier this month that estimating Japan’s neutral interest rate the rate at which monetary policy is neither expansionary nor contractionary remains challenging. The central bank currently estimates this rate to lie somewhere between 1% and 2.5%, a range too wide to guide investor expectations effectively.

This vagueness complicates forward-looking assessments. If the BOJ signals confidence in a neutral rate closer to the lower end, markets may price in a shallower path of rate increases. Conversely, a higher estimate may fuel speculation about more aggressive tightening, which could further depress domestic economic activity already under pressure.

Future Rate Trajectory: A Slow March or Sudden Turns?

The pace of future hikes remains a matter of debate. According to ING, a follow-up rate hike may not occur until October 2026, while Bank of America projects June 2026, with a possibility of moving it forward to April if the yen experiences renewed depreciation. BofA expects the terminal rate to reach 1.5% by the end of 2027, assuming no disruptive external shocks.

Nonetheless, analysts caution that several variables could derail this path. These include a sharp slowdown in the U.S. economy or heightened geopolitical tensions between China and Japan. In the absence of such shocks, the BOJ appears committed to a gradual, cautious tightening cycle. MFS Investment Management’s Carl Ang maintains that only a “material shock” would prompt a major deviation from the projected trajectory.

Bond and Currency Markets Eye BOJ Signals

The bond and currency markets will closely watch the tone and specifics of BOJ commentary. Allianz Global Investors' Gregor MA Hirt highlighted that any direct reference by Governor Ueda to the yen’s weakness could serve as a critical signal potentially a verbal intervention aimed at stabilizing currency expectations.

Given that the BOJ has so far avoided making forex stability a central objective, any shift in language would suggest growing discomfort with the yen’s devaluation. Such a move could influence expectations not only around rates but also around other policy tools, including bond yield control mechanisms.

Policy Normalization Meets Fragile Growth

Japan's anticipated rate hike represents a bold step toward rebalancing decades of accommodative monetary policy. However, the timing is fraught with risk. On one hand, inflation control and yen stability support the case for higher rates. On the other, the recent economic contraction and unclear guidance on the terminal rate could amplify market volatility and investor uncertainty.

The BOJ finds itself at a critical juncture: committed to reforming its monetary stance while navigating a sluggish economy and opaque global outlook. Whether this move marks the beginning of a stable normalization era or exacerbates Japan’s deflationary legacy depends heavily on future policy clarity, currency behavior, and the resilience of domestic demand. Investors and policymakers alike will be watching Friday’s decision and the language that follows with heightened scrutiny.

Source: CNBC

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Gerik

Economic

Shifting From Symbolism to Stalemate

At the start of 2025, the India-U.S. relationship appeared poised for a breakthrough. Prime Minister Narendra Modi and U.S. President Donald Trump met within hours of Trump’s inauguration and jointly announced an ambition to double bilateral trade to $500 billion by 2030. The optics were promising, yet nearly a year later, that momentum has faltered. India now faces one of the highest effective U.S. tariff rates globally exceeding even those imposed on China undermining the initial enthusiasm.

This regression does not reflect a lack of mutual interest. The U.S. urgently seeks reliable supply chain alternatives beyond China, and India offers both capacity and geopolitical alignment. Conversely, India’s export-driven growth aspirations hinge on gaining meaningful access to the American market. Nonetheless, technical hurdles have turned into political paralysis, with each side unwilling to concede on core sensitivities.

Negotiation Gridlock: Tariffs, Agriculture, and Political Calculus

U.S. trade delegations have repeatedly visited New Delhi throughout 2025, but their efforts have yielded no substantial progress. One key factor constraining movement is the absence of sustained political commitment. As former U.S. trade representative Mark Linscott noted, the real barrier is not just policy but political will. He suggested that India might sway Washington through strategic energy deals, such as large-scale ethanol or sustainable aviation fuel purchases.

The United States aims to rebalance its trade deficit with India by expanding agricultural and energy exports. India has shown partial willingness on energy but continues to resist liberalization of its agricultural sector, which remains highly politicized. Washington’s push for India to import genetically modified crops and open its dairy markets has encountered strong backlash from Indian farm lobbies, especially ahead of key state elections in West Bengal, Tamil Nadu, and Kerala. With Uttar Pradesh India’s largest agricultural state due for elections in 2027, concessions in this area appear increasingly unlikely.

Russian Oil and the Sanctions Tightrope

India’s energy policy has become another flashpoint. Washington has pressed India to reduce its Russian oil imports, arguing these purchases undermine Western sanctions on Moscow. In response, the U.S. imposed an additional 25% tariff on Indian goods in August 2025, lifting total duties to as high as 50%. However, India’s foreign ministry has maintained that private refiners base sourcing decisions on global price dynamics, not geopolitics. India has not officially committed to cutting Russian oil imports, and refiners resumed purchases from non-sanctioned Russian suppliers offering deep discounts by November.

This illustrates a strategic divergence rather than a direct conflict. While India seeks affordable energy for its 1.4 billion citizens, Washington views commodity purchases through the lens of foreign policy leverage. Although the U.S. acknowledges a drop in Russian oil volumes, it remains insufficient to lift punitive tariffs. Analysts note that even if the Russia-Ukraine conflict were resolved, agricultural trade barriers would still block any comprehensive agreement.

Economic Frictions and Market Volatility

The lack of a trade agreement is generating measurable macroeconomic consequences. Anand Rathi’s Pradeep Gupta warned that prolonged uncertainty is leading to market hesitancy, especially in sectors reliant on U.S. demand. Volatility in capital flows and currency weakness, particularly a softening rupee, reflect broader investor anxiety. Gupta’s firm estimates that a 50% tariff burden could subtract up to 0.5 percentage points from India’s GDP. Goldman Sachs offers an even more cautious projection, suggesting a 0.6-point drag.

Despite this, Indian exports have remained relatively resilient, with only a temporary decline in October. Analysts like Michael Kugelman of the Atlantic Council argue that India has managed to circumvent some tariff pressures. However, he cautions that deeper concessions especially those entailing political risk are inevitable if a deal is to be secured.

Mounting Costs in the U.S. Domestic Market

In the U.S., higher import tariffs are compounding inflationary pressures. American businesses, particularly small and mid-sized importers of pharmaceuticals, machinery, and household goods, are absorbing rising costs and passing them on to consumers. Some are resorting to high-interest loans to sustain operations amid cost inflation.

Wayne Winegarden of the Pacific Research Institute argues that the current tariff regime damages both nations. He characterizes the Trump-led trade escalation as arbitrary and economically destructive, especially for U.S. families contending with inflated prices. The burden is especially heavy for those importing from India, where duties on key goods have doubled within months.

Strategic Opportunity Lost For Now

Despite strong strategic alignment and long-standing goodwill frequently emphasized by President Trump’s references to Modi as a “great friend” the two countries have failed to formalize a trade pact by year’s end. Citi economist Samiran Chakraborty captured the shift in sentiment when he remarked that India had gone from being a top trade-deal prospect to becoming the last in line.

As 2026 approaches, whether new political incentives or external shocks can break the current impasse remains unclear. For now, the India-U.S. trade relationship is stalled not by the absence of logic, but by the lack of compromise on both sides. The future of this economic alliance will depend on the readiness to bridge this political divide with credible actions not just handshakes.

Source: CNBC

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Winkelmann

Political

Economic

President Donald Trump announced plans to award 1.45 million service members $1,776 payments as he sought to reassure Americans concerned about his stewardship of the US economy.

"Military service members will receive a special — we call Warrior Dividend — before Christmas, in honor of our nation's founding in 1776," Trump said.

Trump announced the plan Wednesday during a prime-time address from the White House meant to extol his accomplishments this year and assuage Americans increasingly worried about their cost of living.

The planned payments — pegged to the year the US declared its independence from Great Britain — are broadly in keeping with the administration's efforts to steer financial rewards to certain constituencies.

Administration officials cast the address as an opportunity to highlight the president's accomplishments in his first year back in the White House and preview new policies for 2026, but the remarks come at a critical moment with Trump confronting mounting public anxiety about his economic agenda and his advisers struggling to hone their messaging.

Voters returned Trump to office in part to address the persistent inflation that plagued former President Joe Biden. And Trump spent much of his remarks looking to lay the blame at the foot of his predecessor, detailing price increases during the prior administration.

"11 months ago, I inherited a mess, and I'm fixing it," Trump said. "When I took office, inflation was the worst in 48 years, and some would say in the history of our country, which caused prices to be higher than ever before, making life unaffordable for millions and millions of Americans."

Trump now finds himself facing the same economic headwinds. Surveys show Americans are worried about the cost of living and inflation, fears that powered rival Democrats to key electoral wins in November and pose a major threat to Trump and Republicans in 2026 elections that will decide control of Congress and the future of his legislative agenda.

A Reuters/Ipsos poll released Tuesday showed Trump's approval rating had slipped to nearly its lowest level of his second term in office, with just 39% of US adults approving of his job performance.

Trump's own inconsistent messaging on the economy has made his task harder. The president has vacillated between deriding voter anger over affordability as a Democratic "hoax" and at times emphasizing lower prices for gasoline and eggs as positive bellwethers.

Trump graded his record on the economy as an "A-plus-plus-plus-plus-plus," while insisting that his administration needs more time to remedy what he says was a mess left by Biden. The president also is in the final stages of a search for a new Federal Reserve chair.

"I'll soon announce our next chairman of the Federal Reserve, someone who believes in lower interest rates, by a lot, and mortgage payments will be coming down even further. Early in the new year, and you will see this in the new year, I will announce some of the most aggressive housing reform plans in American history," Trump said.

Trump sought to rally viewers by touting his work on other issues, saying he had stopped the flow of undocumented migrants and drugs while bolstering the military and brokering a ceasefire in Gaza.

"Boy, are we making progress. Nobody can believe what's going on," Trump said.

Source: Bloomberg Europe

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Michelle

Forex

Economic

Cooling CPI Print Lifts Rate-Cut Expectations and Risk Appetite

U.S. inflation data delivered a clear downside surprise, giving traders fresh evidence that price pressures continue to ease and strengthening expectations for further Federal Reserve policy support. November consumer prices rose at a slower pace than forecast, reinforcing the view that the Fed's recent rate cuts are gaining traction across the economy.

Headline and Core Inflation Undershoot Forecasts

The Consumer Price Index increased 2.7% year over year in November, below the 3.1% consensus estimate. Core CPI, excluding food and energy, rose 2.6% from a year earlier, also undershooting expectations for a 3.0% gain. On a two-month, seasonally adjusted basis covering September through November, both headline and core prices advanced 0.2%. The report follows a disruption in October data collection due to a federal government shutdown, making this release especially important for policy and positioning.

Energy and Shelter Remain Key Contributors

Energy prices remain a notable upside factor, with the energy index up 4.2% year over year. Electricity prices climbed 6.9%, while natural gas surged 9.1%, highlighting ongoing cost pressure for households and utilities. Shelter inflation eased but stayed firm at 3.0% annually, confirming that housing costs are slowing gradually rather than collapsing. These components continue to shape inflation persistence even as broader price growth cools.

Services Inflation Moderates as Goods Stay Contained

Services excluding energy rose 3.0% over the past year, signaling moderation compared with earlier readings. Medical care services increased 3.3%, while transportation services advanced 1.7%. Goods inflation remained contained, with commodities excluding food and energy up just 1.4% year over year. Used cars and trucks rose 3.6%, but apparel prices increased only 0.2%, underscoring limited pricing power outside select categories.

Federal Reserve Signal Turns More Supportive

The softer CPI print follows the Fed's third consecutive 25-basis-point rate cut earlier this month. Market participants increasingly view the central bank as prioritizing labor market stability as inflation trends lower. Equity investors interpreted the data as reinforcing a policy backstop, while bond markets leaned toward expectations that easing may extend further than previously priced.

Market Forecast: Short-Term Bullish Bias

The November CPI report supports a short-term bullish bias for risk assets. Cooling headline and core inflation strengthen the case for continued Federal Reserve easing, improving sentiment across equities and credit while keeping pressure on yields. Unless upcoming data reverse this trend, markets are likely to favor growth exposure and rate-sensitive sectors in the near term.

Source: FX Empire

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Adam

Economic

Investors' top focus today is the delayed - and slightly unusual - U.S. consumer price inflation report, which will be an important marker for whether the Federal Reserve is likely to keep cutting interest rates next year. Meanwhile, Wall Street will be watching the tech sector again after the latest signs of bubble trouble due to big spending AI plans at the likes of Oracle.

I’ll get into all the market news below.

But first check out Mike Dolan’s latest column on why the Bank of England, which is due to cut UK rates very shortly, probably needs to start picking up the pace.

And listen to thelatest episode of the new Morning Bid daily podcast. Subscribe to hear Mike and other Reuters journalists discuss the biggest news in markets and finance seven days a week.

Today's Market Minute

Oil and gas major BP has appointed Meg O'Neill, the head of Australia's Woodside Energy as its next CEO to lead its effort to boost profits and refocus on oil and gas after a detour into renewables.

ROI Energy Columnist Ron Bousso argues that the surprise appointment of O'Neill as BP's first outsider CEO offers the bruised $90 billion British oil company three clear strategic choices for moving forward: build, buy or be bought.

In a high-security Shenzhen laboratory, Chinese scientists have built what Washington has spent years trying to prevent: a prototype of a machine capable of producing the cutting-edge semiconductor chips that power artificial intelligence, smartphones and weapons central to Western military dominance, Reuters has learned.

Asia's imports of U.S. crude oil, coal and liquefied natural gas are on track to decline this year despite President Donald Trump's efforts to boost shipments as part of his trade and tariff policies, writes ROI Asia Commodities Columnist Clyde Russell.

There is much discussion in U.S. economic circles around "R-star", the theoretical rate of interest that neither spurs nor crimps economic activity. But Federal Reserve officials could soon shift their focus to "U-star," argues ROI Finance Columnist Jamie McGeever.

Optics and Oracles

The day's top focus is the delayed U.S. consumer price inflation report for November out at 1330 GMT. It will be an important marker for whether the Fed is likely to keep cutting its interest rates next year, although this is not a normal CPI report by any stretch.

As the government was in shutdown mode the October data wasn’t collected, so there won’t be the usual monthly change number that traders normally zoom in on, meaning the focus will instead be on the year-on-year rates, and how those compare to the previous print in September.

Economists asked by the Reuters polling team reckon CPI likely increased 3.1% year-on-year in November, which would be the largest gain since May 2024 and up from the 3.0% advance in the 12 months through to September.

But the CPI could print below expectations as the delays to the data collection process mean it was being done when holiday season discounting was in full swing, which could be evident in lower prices for things like furniture and recreation goods.

The tech darlings will undoubtedly remain in the spotlight, too. Wall Street took a turn for the worse Wednesday after ominous-looking news around a $10 billion funding deal for one of Oracle's big U.S. data centres slammed its shares again and saw the mighty Mag 7 have its worst day in over a month. It's all to do with nagging concerns about the stratospheric amounts of money pouring into artificial intelligence - and whether it has inflated the mother of all bubbles.

Before we get to all that though there is plenty of top-tier European action to get through. The Bank of England looks a sure bet to cut UK interest rates. It already was before a soft inflation reading on Wednesday, so the bigger question will be - as Mike Dolan notes - how quickly it follows up.

We'll then hop over to Frankfurt where Christine Lagarde's European Central Bank will stay on hold, something it is likely to be doing for a long, long time. And in Brussels it is supposed to be decision day in the EU's long-running drama of how to use frozen Russian central bank reserves to prop up Ukraine.

Boomeranging back to the U.S. there's weekly jobless claims data, too. It probably won’t move the dial too much, even if it does coincide with the December nonfarm payrolls survey week, and lastly earnings are due from both Nike and FedEx after the close, both of which are seen as pretty decent bellwethers for the global economy at large.

Chart of the day

Cost of insuring Oracle's debt has roughly trebled for investors this year

Concerns around a potential AI bubble are simmering. Server-giant Oracle seems to be front and center. Its 5-year credit default swaps, which debt investors use to hedge their exposure to the firm, have surged to their highest level since the global financial crisis, while its shares have halved in price since mid-October's flagship deal with OpenAI pushed them up by over a third.Analysts worry that the company’s capital expenditure is expected to rise nearly 70% to $35 billion - more than half the firm's anticipated revenue. By comparison, Microsoft’s proportion will be around 30%.

Today's events to watch (times in GMT)

1200 – Bank of England Rate Decision

1315 – ECB Rate Decision

1330 – U.S. November CPI

1330 – U.S. Weekly Initial Jobless Claims

1330 – U.S. Dec. Philly Fed Survey

Nike earnings

FedEx earnings

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles is committed to integrity, independence, and freedom from bias.

Source: reuters

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Adam

Commodity

Gold (GC=F) wavered near a record, as investors tracked mounting tensions in Venezuela and awaited US inflation data. Platinum (PL=F) extended a breakneck rally, surging close to $2,000 an ounce before paring gains.

Bullion traded around $4,320 an ounce, after rising 0.8% on Wednesday. It’s about $60 away from an all-time high reached in October. Inflation numbers due Thursday will be watched closely for clues on the Federal Reserve’s appetite for further interest-rate cuts.

The Fed delivered its third straight rate cut last week — a tailwind for precious metals, which don’t pay interest — but has been ambiguous about the pace of monetary easing heading into next year. Traders are assigning a roughly 25% chance of a reduction in January.

Heightened tensions can enhance the appeal of precious metals, and events in Venezuela, where Trump has ordered a blockade of all sanctioned oil tankers, have given them a boost this week. A greater US military presence in the region is raising pressure on the government of Nicolás Maduro, with Mexico and Brazil offering to mediate.

“The direction of real yields has become more supportive,” said Dilin Wu, a research strategist at Pepperstone Group Ltd. in Australia. “Add ongoing geopolitical uncertainty and thinner year-end liquidity, and precious metals are regaining their role as portfolio stabilizers.”

Gold has jumped about two-thirds this year and is on track for its best annual performance since 1979, after a blistering rally driven by central-bank buying and inflows into gold-backed exchange traded funds.

Meanwhile, platinum rose for a sixth session. The metal has more than doubled this year, and is set for the biggest annual gain in data compiled by Bloomberg going back to 1987.

The surge has come as the London market shows signs of tightening, as banks park metal in the US to insure against the risk of tariffs. Exports to China have also been robust this year, and optimism for the nation’s demand has been bolstered as futures recently began trading on the Guangzhou Futures Exchange.

Open interest and trading volumes have surged in Guangzhou for the nearest contract in June, while prices on the exchange have risen well above other international benchmarks, adding fuel to the global rally.

Gold dipped 0.3% to $4,325.23 an ounce as of 11:03 a.m. in London. Platinum rose to $1,923.39 having earlier hit the highest since 2008. Silver edged lower, and palladium rose. The Bloomberg Dollar Spot Index nudged up 0.1%.

Source: Bloomberg

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Glendon

Forex

Economic

The European Central Bank left interest rates unchanged for a fourth straight meeting as inflation hovers around target and the euro zone weathers global shocks.

The deposit rate was kept at 2% on Thursday — as predicted by all analysts in a Bloomberg survey. Policymakers continued to offer no guidance on future steps, stressing that they'll act one meeting at a time based on incoming data.

Fresh forecasts accompanied the decision, envisaging firmer economic expansion and inflation returning to 2% in 2028 after falling short of that level during the next two years.

The updated assessment "reconfirms that inflation should stabilize at the 2% target in the medium term," the ECB said in a statement.

The euro erased an earlier drop to trade about $1.1733. Bunds edged down, with the 10-year yield one basis point higher at 2.87%.

Most ECB officials had already signaled that the inflation undershoot requires no immediate action, with analysts in a separate poll suggesting borrowing costs could remain where they are through 2027.

That's not the case everywhere. The Bank of England cut rates earlier in the day after a similar move last week by the Federal Reserve. Both may loosen further next year.

Investors, though, have been discounting the chance of further easing globally and have begun betting on a first increase by the ECB as early as 2026. President Christine Lagarde will offer her assessment at a press conference at 2:45 p.m. in Frankfurt.

The backdrop to this week's meeting is an economy that looks sturdier than it has in recent months, having maintained expansion through the worst of the trade strife and even surpassed expectations in the third quarter.

Business surveys published by S&P Global signal steady momentum in the final months of the year, with fiscal stimulus in Germany to help underpin growth beyond that.

On inflation, officials have signaled they're ready to accept the prospect of prices growing at less than their targeted pace for some time. Executive Board member Isabel Schnabel has said she wouldn't be too concerned as long as such deviations are small.

Lithuanian central-bank chief Gediminas Simkus, who'd previously battled to keep the door open to another cut, has also said he no longer sees a need to ease further due to the economy's surprising strength.

A prolonged pause for rates would cap the loosening cycle at eight cuts. That would be welcomed by Schnabel, who thinks the next move — whenever it comes — will probably be a hike.