The Bank of Japan (BOJ) is signaling to markets that it may raise interest rates as early as next month.

Sources familiar with the matter revealed that the BOJ has been sending increasingly hawkish signals over the past week, reminding markets that a December rate hike remains a viable option. This policy shift follows a crucial meeting between BOJ Governor Kazuo Ueda and newly appointed Prime Minister Sanae Takaichi, which appears to have resolved political opposition to monetary tightening.

Market reaction was immediate. Japan's 10-year government bond yield surged to 1.821% on rate hike expectations, while the 5-year yield hit a 17-year high following hawkish comments from a policy board member. A recent survey shows slightly more than half of economists expect the BOJ to raise rates at its December 18-19 meeting.

While the final decision between December and January remains finely balanced and largely dependent on the Federal Reserve's moves, recent BOJ officials' remarks reflect growing consensus that the yen's persistent weakness poses greater inflation risks than ever before. The yen has recently weakened to around 155 against the dollar - a level that previously triggered intervention warnings.

Hawkish voices within the BOJ are gaining strength. Policy board member Junko Koeda recently stated that the central bank must continue raising real rates given "relatively strong" price movements. Another member, Kazuyuki Masu, noted in a published interview that the timing for rate hikes is "approaching." These comments suggest they may join two other hawkish board members who unsuccessfully proposed raising rates from 0.5% to 0.75% in September and October.

Notably, Governor Ueda, previously seen as dovish, has shown subtle shifts in stance. His recent parliamentary remarks about discussing the "feasibility and timing" of rate hikes at upcoming meetings contrast with earlier statements about having "no preset schedule" for policy changes. Ueda also emphasized that yen weakness could affect core inflation, indicating the BOJ now views currency fluctuations as having more lasting price impacts.

Political resistance to tightening appears to be easing. While Prime Minister Takaichi's appointment initially complicated BOJ policy decisions, the yen's decline to 10-month lows has strengthened the case for near-term rate hikes. Finance Minister Satsuki Katayama recently expressed no particular opposition to the BOJ's rate hike path, and Governor Ueda indicated the Prime Minister appears supportive of gradual tightening to achieve the 2% inflation target.

Market participants are taking note. "The BOJ is clearly sending signals to avoid surprising markets if it decides to hike in December," said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities. Katsutoshi Inadome of Sumitomo Mitsui Trust Asset Management sees higher odds for December action given the lack of political opposition.

As hawkish signals multiply, investors are repricing Japanese assets. Beyond surging bond yields, markets widely anticipate imminent tightening. A Reuters poll shows all economists expect rates to reach 0.75% by March 2024.

However, the Federal Reserve's actions remain the key variable. The Fed's December 10 meeting outcome could significantly impact BOJ decisions - a Fed pause might weaken the yen further, increasing pressure for BOJ action, while Fed rate cuts could relieve such pressure.

Despite uncertainties, the BOJ's latest signals serve as a clear warning that investors can no longer assume prolonged low rates. As Kristina Hooper, chief market strategist at Man Group in New York, observes: "There appears to be genuine desire for monetary policy normalization," countering market assumptions that the new government would force continued easing.