Bank of Japan Governor Kazuo Ueda recently made a rare hawkish statement in Nagoya—he explicitly stated that at the upcoming monetary policy meeting on December 18-19, they would “seriously weigh the pros and cons of a rate hike.”

As soon as he said this, the market reacted explosively. Previously cautious traders began to bet that the Bank of Japan was really going to act this time, and that interest rates might jump directly from the current 0.50% to 0.75%. The bond and forex markets responded immediately—Japanese government bond yields surged across the board, and the yen strengthened significantly against the US dollar.

Why does the Bank of Japan suddenly want to raise rates? There are actually several key reasons behind this.

First, inflation and prices have exceeded targets for several consecutive months. Japan’s inflation has persistently stayed above the central bank’s target, and wages are rising. The labor market is getting tighter, forcing companies to raise pay to retain employees.

Second, the prolonged environment of ultra-low or even negative interest rates is starting to show side effects. Cheap money has kept some “zombie companies” alive when they should have been weeded out, actually dragging down the overall vitality of the economy. Resource allocation has been distorted, and the risks of excessive borrowing and asset bubbles are building up.

From a macro perspective, the central bank wants to gradually “normalize” interest rates to restore the financial system to a healthier state. In other words, they can’t keep propping things up with money printing and zero rates forever. Bad assets need to be cleaned up, and financing activities need to be regulated where necessary.

However, the Bank of Japan also emphasized that a rate hike would not be a “hard brake” or a violent tightening, but rather “gradual” and “steady”—the goal is to gently tighten financial conditions, not to abruptly choke off economic activity.

So what impact will this move have?

**For Japan domestically:** Borrowing costs will definitely rise. Corporate financing, consumer loans, and mortgages will all be affected. In the short term, there could be pressure on real estate and business investment, but in the long run, this helps curb inflation, optimize resource allocation, and clear out those struggling on low-interest life support.

**For exchange rates and capital flows:** A stronger yen is almost inevitable. This means international capital relying on yen carry trades will be impacted. In the past, many borrowed low-interest yen to invest in higher-yielding assets elsewhere. Now, as yen interest rates rise, this strategy becomes less attractive and capital may flow back to Japan.

**For global markets:** Japan is a major player in the global bond market. If Japanese government bond yields rise, it could trigger a chain reaction—increased selling pressure in global bond markets and generally higher yields. Such volatility will ripple through to Asia, Europe, and the US, and could indirectly affect liquidity in risk assets (including cryptocurrencies).

In short, Kazuo Ueda’s speech this time is not just a domestic Japanese issue—it’s a key signal that could shift global capital flows and market sentiment.