The Bank of Japan’s upcoming policy meeting is shaping up to be a major test for the yen, with markets bracing for potentially sharp currency moves as investors attempt to decipher when the central bank will deliver its next interest-rate increase. The uncertainty is compounded by domestic political risks, including the growing prospect of a snap general election that could complicate the BOJ’s messaging and policy path.
All 52 economists surveyed by Bloomberg expect the BOJ to keep policy unchanged when it concludes its meeting on Friday, following last month’s rate hike that lifted the overnight interest rate to 0.75% — the highest level seen in three decades. That move marked another step away from Japan’s long era of ultra-loose monetary policy and narrowed the interest-rate gap with the United States. Yet it has failed to provide lasting support for the yen, which remains under persistent downward pressure.
This puts Governor Kazuo Ueda in a delicate position. With markets already primed for no change, his post-decision press conference will be critical in shaping expectations. If he leans too heavily on cautious or familiar language, traders betting against the yen may see an opening to push it lower. On the other hand, sounding overly hawkish could fuel speculation of an imminent rate hike, potentially triggering volatility across bond and currency markets.
Ueda’s challenge is to convince investors that the direction of travel for rates remains upward, without committing the BOJ to a specific timetable. Any misstep risks reviving the kind of abrupt yen selloff seen after earlier policy meetings, when markets judged central bank communication as insufficiently firm.
Fundamentally, the case for further tightening is strengthening. Fresh inflation data due Friday are expected to show that consumer prices have averaged above the BOJ’s 2% target for four consecutive calendar years. That milestone would reinforce the view that inflation is no longer a temporary phenomenon driven solely by imported costs, but is becoming embedded in Japan’s domestic economy through wages and services prices.
A persistently weak yen adds to the concern. While it supports exporters, prolonged currency depreciation raises import costs and risks pushing inflation higher than the BOJ intends. With interest rates still deeply negative in real terms, some economists argue that policy remains too accommodative given current economic conditions.
Nearly 60% of economists surveyed believe the BOJ is already behind the curve. That sentiment is shared internationally. US Treasury Secretary Scott Bessent recently underscored the importance of “sound formulation and communication of monetary policy” by Japan following discussions with Finance Minister Satsuki Katayama in Washington, where currency volatility was high on the agenda.
Market expectations suggest gradualism remains the base case. Around 68% of BOJ watchers anticipate one rate hike roughly every six months, a pace that would place the next move around June or July. Still, about three-quarters of respondents see the yen as a key risk that could force the central bank to act sooner than planned.
That view appears to be gaining traction within the BOJ itself. While officials emphasize that there is no preset path for interest rates, people familiar with internal discussions say that further yen weakness — particularly if it feeds into inflation expectations — could prompt policymakers to move earlier than markets currently expect.
Complicating matters further is the political backdrop. The emergence of Prime Minister Sanae Takaichi as a frontrunner has unsettled markets. Takaichi is a known critic of aggressive BOJ tightening and is widely perceived as favoring expansionary fiscal policy. Her intention to call a snap election as early as next month has added to downward pressure on the yen, with investors betting that an electoral victory would give her greater leeway to spend freely and potentially slow the pace of monetary normalization.
For Governor Ueda, the prospect of an early election is an unwelcome distraction. Central bank independence is formally enshrined, but political pressure can influence expectations and market psychology. Navigating questions about the yen — while avoiding any perception of conflict with the government — will add another layer of complexity to his post-meeting remarks.
“We see the next hike in July,” said one market economist. “With Prime Minister Takaichi looking poised to call a snap election, we expect Governor Ueda to play his cards close, sticking to recent guidance to avoid inviting unwanted attention. He’ll likely deflect questions on the yen by emphasizing that exchange-rate policy is the government’s domain.”
Beyond Japan, a packed global calendar ensures that markets will be digesting a flood of economic data and policy signals. The holiday-shortened US trading week will be headlined by Thursday’s personal income and spending report, which includes the Federal Reserve’s preferred inflation measure.
Economists forecast that the core personal consumption expenditures (PCE) price index — which excludes food and energy — rose 0.2% in November from the previous month. On an annual basis, core PCE inflation is seen at 2.8%, still well above the Fed’s 2% target. That reading reinforces the prevailing view among US policymakers that there is little urgency to resume rate cuts after three consecutive reductions.
The Bureau of Economic Analysis has noted that, due to gaps created by last year’s record-long government shutdown, it will use an average of September and November consumer price index data to fill in missing October inputs. Even with that adjustment, inflation is expected to remain sticky.
Signs that the US labor market is stabilizing — alongside steady economic growth — have strengthened expectations that the Fed can afford to pause and wait for further clarity. Personal spending in November is projected to remain robust, underscoring continued consumer resilience.
Fed officials are now in their blackout period ahead of the Jan. 27–28 policy meeting. Other US data releases in the coming week include the final estimate of third-quarter GDP and the University of Michigan’s final January reading on consumer sentiment.
In Canada, December inflation is expected to tick up slightly from November’s 2.2%, partly due to base effects from last year’s temporary goods and services tax holiday. However, falling gasoline prices and easing rents should keep inflation only modestly above the Bank of Canada’s 2% target. As a result, markets see little chance of a policy shift, with rates likely to remain at 2.25% for much of the year.
Asia’s central banks will also be in focus. Chinese banks are expected to hold loan prime rates steady, while Indonesia’s central bank is forecast to keep its policy rate at 4.75%. Malaysia is also seen maintaining its overnight policy rate, with investors paying close attention to guidance on global risks.
Data across the region will help flesh out the growth outlook. China’s release of fourth-quarter GDP, along with retail sales, industrial production and property indicators, will anchor the week after policymakers signaled room for further easing. Taiwan’s export orders will offer insight into the global electronics cycle, while Japan’s trade figures and CPI data will set the stage for the BOJ decision.
Europe will deliver its own wave of market-moving events. UK data are expected to show a further cooling in wage growth and a slight, likely temporary, pickup in inflation to around 3.3%, well above the Bank of England’s 2% target. BOE officials, including Governor Andrew Bailey, are also scheduled to testify before lawmakers on financial stability.
In the euro zone, preliminary PMI readings, investor confidence surveys, and the European Central Bank’s account of its December meeting will guide expectations. ECB President Christine Lagarde is due to make several appearances at the World Economic Forum in Davos, where global policymakers will gather amid heightened economic and geopolitical uncertainty.
Emerging markets will add to the busy agenda. Mexico’s mid-month inflation report will be the last key input before its February policy meeting, with economists largely expecting rates to remain on hold after a long easing cycle. Turkey is widely forecast to deliver another rate cut, while Norway’s central bank is expected to stay on hold as it awaits clearer signs of easing price pressures.
Against this crowded global backdrop, the BOJ’s message — and the yen’s reaction — will stand out. With inflation entrenched, political uncertainty rising, and markets increasingly sensitive to currency moves, Governor Ueda’s words may matter as much as the decision itself.
