Bank of Japan (BOJ) Governor Kazuo Ueda is expected to announce a significant interest rate hike on Friday, marking the highest level since 2008. This decision comes as global financial markets exhibit stability in response to the return of U.S. President Donald Trump to the White House.
BOJ officials are optimistic about a rate hike at the conclusion of this week’s two-day meeting, barring any unforeseen disruptions from Trump’s recent inauguration, sources familiar with the matter told Bloomberg earlier this month.
The anticipated rate increase would be Ueda’s third within the past year, a stark shift after 17 years without a hike prior to March 2024. A quarter-percentage point hike, if realized, would be the largest adjustment since 2007, signifying the BOJ’s gradual normalization as counterparts like the Federal Reserve and the European Central Bank contemplate pausing their easing cycles.
Despite the hike, Japan’s borrowing costs will remain among the lowest in developed nations. The primary focus on Friday will be Ueda’s strategic outlook for future rate increases, especially given the market volatility that followed the BOJ’s last hike in July. Analysts and investors will closely scrutinize his communication strategy.
“The BOJ is going to raise rates,” stated Chotaro Morita, chief strategist at All Nippon Asset Management Co. “There were no major shocks, and no tumbling of stocks on Trump’s first day.”
The yen gained strength against the dollar early Tuesday, bucking the trend among Group-of-10 currencies. This reaction was driven by traders’ confidence that Trump’s initial tariff measures wouldn’t deter the BOJ from proceeding with a rate hike. Meanwhile, Japanese stock markets showed limited gains, and bond yields decreased.
Leading up to the BOJ meeting, Deputy Governor Ryozo Himino and Governor Ueda have both hinted strongly at a potential rate hike. These signals have been perceived as clear indicators by financial markets, with overnight-indexed swaps reflecting over a 90% probability of a rate hike, a sharp rise from 41% at December’s end. Economists largely concur, with around 75% predicting an upward move on Friday.
A failure to follow through on the anticipated hike could lead to significant criticism of the BOJ’s signaling strategy.
The central bank is also expected to revise its quarterly inflation projections, indicating sustained levels around the BOJ’s 2% target for the next two years. This projection aligns with the latest inflation data, which is anticipated to show a 3% increase in the key gauge — a significant mark above the BOJ’s target.
Prime Minister Shigeru Ishiba’s government, grappling with public discontent over living costs, appears to have accepted the potential rate hike. Ishiba’s administration, which began in October with modest approval ratings that have since declined, views the hike as a stabilizing factor in ongoing budget negotiations.
Japan’s business leaders have largely supported the potential rate hike. Masakazu Tokura, head of Keidanren, Japan’s largest business lobby, acknowledged the need for the BOJ to reassess its interest rate policies given sustained inflation above 2%.
The BOJ’s current approach contrasts sharply with the resistance it encountered during rate increases in the 2000s. Governor Ueda is likely to emphasize cautious, incremental adjustments during his post-meeting press conference, maintaining flexibility in the bank’s long-term strategy.
Despite speculation about the BOJ’s impending rate hike, the yen has remained weak due to significant yield differentials between Japan and the U.S. Retail investors and overseas funds have collectively increased bearish yen positions to $13.7 billion. This decline prompted verbal interventions from Japanese authorities, hinting at possible direct action to stabilize the currency.
“The move toward a strong yen may be limited even with a rate hike,” noted Daisuke Karakama, chief market economist at Mizuho Bank. “As the focus shifts toward the Fed’s potential pause in rate cuts, markets may push for another BOJ rate hike via yen selling.”
