The Bank of Japan may raise interest rates again in december.

The Japanese yen has slightly appreciated amid expectations that the Bank of Japan (BOJ) might increase interest rates in December. BOJ Governor Kazuo Ueda signaled the possibility of a rate hike next month, citing concerns over the yen's persistent depreciation. Additionally, the yen has gained support from heightened demand for safe-haven assets following U.S. President-elect Donald Trump’s decision to increase import tariffs on goods from China, Mexico, and Canada.

Japan's leading economic index, which gauges the economy's outlook over the coming months based on data such as employment announcements and consumer confidence, was revised down to 109.1 in September. However, consumer confidence improved to a five-month high. At the same time, the unemployment rate dropped to 2.4%, the lowest since January, while the services sector continued to grow steadily from the start of the year. In contrast, the manufacturing sector's activity remained in contraction.

Japan's Manufacturing PMI edged down slightly to 49.0 in November, marking its lowest level since March, from 49.2 in October. This figure fell below market expectations of 49.5 and represented the fifth consecutive month of contraction in manufacturing activity. Both output and new orders continued to decline, while weak external demand, a key factor for exports, persisted. As a result, companies reduced employment for the first time since February, although input costs are expected to decline further in the future.

Meanwhile, the Services PMI rose to 50.2 in November from 49.7 in the previous month, indicating a rebound in service sector activity. This improvement was driven by a slight increase in new orders compared to October, while the decline in overseas orders also slowed, suggesting a potential rise in exports. On the cost side, production costs increased slightly, but companies were able to pass these costs on through higher prices at a faster rate.

Overall inflation fell to 2.3% year-on-year in October 2024 from 2.5% in the prior month, marking the lowest level since January. Electricity prices saw a modest increase of 4%, the smallest rise in six months, as the impact of energy subsidies expiring in May started to wane. However, inflation in housing and oil prices rose slightly, which could contribute to higher input costs.

Core inflation, which excludes volatile food and energy prices, edged up to 2.3% year-on-year in October. This represented the second consecutive month of slowing growth, despite exceeding market expectations of 2.2%. The BOJ continues to view core inflation as above its 2% target, prompting market speculation that it may maintain its tight monetary policy stance. Governor Kazuo Ueda recently stated that monetary policy decisions will depend on available data. Nonetheless, he hinted at a possible rate hike in December, given the yen's continued depreciation.