The Bank of Japan is very likely to take action at the meeting on December 18-19—raising the benchmark interest rate from 0.5% to 0.75%. There is basically no suspense about this. The real question worth pondering is where the path of rate hikes will ultimately lead?

The answer lies in the concept of "neutral interest rate." Simply put, the neutral interest rate is the level that neither fuels the economy nor drags it down. The Bank of Japan's own estimate of the nominal neutral interest rate range is approximately between 1% and 2.5%. This range has become a key reference for the market to judge the future policy direction.