By Leika Kihara

TOKYO (Reuters) – The Bank of Japan (BOJ) is cautious about the timing of its next rate hike, with December not guaranteed due to weak consumption and uncertainties surrounding U.S. economic policy under a second Trump presidency.

BOJ Governor Kazuo Ueda indicated in a recent Nikkei interview that a rate hike is nearing, but he also cautioned about potential U.S. economic risks, leading to fluctuating market expectations between December and January.

Having navigated Japan through a decade of easy monetary policy, the BOJ is cautious about accelerating the withdrawal of support after a surprise rate hike in July caused significant market volatility.

Geopolitical tension and uncertainty regarding Donald Trump's future policies also heighten caution among global policymakers, including Japan. Following solid inflation data last week, market expectations for a December hike rose to around 60% but then dropped below 40% as doubts emerged from media reports indicating a more cautious BOJ stance.

Dovish BOJ board member Toyoaki Nakamura mentioned that a December hike remains data-dependent. Although the BOJ aims for a rate hike by March, it is likely to retain flexibility regarding the exact timing, according to sources familiar with its deliberations.

Following the Dec. 18-19 BOJ meeting, there are subsequent reviews on Jan. 23-24 and March 18-19. There is a strong belief within the BOJ that increasing wages will drive firms to raise prices, a key factor for another rate hike. Regular pay has risen by approximately 2.5-3% annually, and Japan's largest labor union plans to seek at least a 5% wage increase in 2025.

Inflation has exceeded the BOJ's 2% target for over two years, with rising labor costs affecting service prices. However, household spending fell for the third consecutive month in October due to increasing living costs, and factory output remained stagnant, while exports to the U.S. dropped.

The BOJ has already reduced stimulus twice in 2023, ending negative interest rates in March and increasing short-term borrowing costs to 0.25% in July. Ueda has reiterated that the BOJ will continue to raise rates if economic and price developments align with its forecasts, leading many analysts to anticipate another hike by March.

With a data-driven approach to policy-setting, indicators leading up to the December meeting will attract significant market attention. Revised third-quarter GDP data is expected on Monday, followed by the BOJ's quarterly 'tankan' business survey on Dec. 13.

Ueda emphasized the need to consider potential higher tariffs from Trump, which adds to global economic uncertainty. Analysts suggest the BOJ is under less immediate pressure to hike rates, indicating a preference for timing its decisions among the three upcoming meetings.

"I don't see the BOJ as in a huge rush, as long as it can hike by March," stated veteran BOJ watcher Mari Iwashita, chief market economist at Daiwa Securities. "For the BOJ, it's just a question of choosing the most optimal timing among the three meetings."