The Bank of Japan is expected to raise interest rates on Friday barring any market shocks after U.S. President-elect Donald Trump takes office Monday, a move that would lift short-term borrowing costs to levels unseen since the 2008 global financial crisis.
A tightening in policy would underscore the central bank's resolve to steadily push up interest rates, now at 0.25%, to near 1% - a level analysts see as neither cooling nor overheating Japan's economy.
At the two-day meeting ending on Friday, the BOJ is likely to raise its short-term policy rate to 0.5% unless Trump's inaugural speech and executive orders upend financial markets, sources have told Reuters.
In a quarterly outlook report, the board is also expected to raise its price forecasts on growing prospects that broadening wage gains will keep Japan on track to sustainably hit the bank's 2% inflation target.
A hike by the BOJ would be the first since July last year when the move, coupled with weak U.S. jobs data, shocked traders and triggered a rout in global markets in early August.
Keen to avoid a recurrence, the BOJ has carefully prepared markets with clear signals by Governor Kazuo Ueda and his deputy last week that a rate hike was on the cards. The remarks caused the yen to rebound as markets priced in a roughly 80% chance of a rate increase on Friday.
There were also hints of near-term action last month. While the BOJ held off raising rates at the Dec. 18-19 meeting, hawkish board member Naoki Tamura proposed pushing up rates. Some of his colleagues also saw conditions fall into place for an imminent rate hike, minutes of the meeting showed.
With a policy tightening this week seen as a near certainty, market attention is shifting to Ueda's post-meeting briefing for clues on the timing and pace of subsequent increases.
As inflation has exceeded the BOJ's 2% target for nearly three years and the weak yen has kept import costs elevated, Ueda is likely to stress policymakers' resolve to continue raising interest rates.
But there is good reason to tread cautiously. While the International Monetary Fund raised its forecast for global growth in 2025, Trump's policies risk destabilising markets and stoking uncertainty about the outlook for Japan's export-reliant economy.
Domestic political uncertainty could heighten, too, as Prime Minister Shigeru Ishiba's minority coalition may struggle to pass budget through parliament and win an upper house election scheduled in July.
The economic damage caused by past ill-fated rate hikes also haunt BOJ policymakers. The BOJ ended quantitative easing in 2006 and pushed short-term rates to 0.5% in 2007, moves that triggered a storm of political criticism as delaying an end to deflation.
The BOJ cut rates from 0.5% to 0.3% in October 2008, then to 0.1% in December of that year, as the global financial crisis pushed Japan into recession. Since then, various unconventional steps have kept borrowing costs stuck near zero.
"Japan had a permanently low growth rate, inflation rate and lower level of interest rates. So policymakers, investors and the business community still ask - have we really broken free from that?," said Jeffrey Young, chief executive officer of DeepMacro.
"The BOJ is going to have to explain very carefully that they're raising rates to move away from the extraordinary policy that they adopted."
© Thomson Reuters 2025
10 Comments
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MiuraAnjin
Baby steps...
Don't rock that boat too much
SDCA
Export-reliant where? I couldn't care less if Toyota is selling better in other countries if it means we have to pay a higher price for energy and other goods/ services.
Better hope so.
Speed
I liked it better when there was a recession/deflation. At least the prices were stable. Prices for me have gone up about 30-40% on most fresh foods, bread and dairy that I buy.
ebisen
One thing is clear - Nobody teaches bank of Japan how to do business, LEAST of all some American bank bailed-out by the government on American tax payers' expense. Usually the Japanese get it right, keep it stable and limit damages the best.
WoodyLee
No matter what the BOJ does it is always tight to the U.S. economic outlook, Trump is going to do what ever he thinks needs to be done to stop the rest from destroying the U.S job market and industry then will watch the chips fall where they may.
For too long the rest of the world got a free ride off the backs of the U.S, Japan, and the rest of free world markets and that is NOT FAIR TRADE, free markets are suppose to be a two way trade but for many it is only a one - way trade.
Yrral
Woody, American will be fighting over shoes,if China stop selling America shoes
tora
Well many here are struggling to pay their mortages as it is. And since most are on floating rates, expect many to default. Japanese households just can't handle ANY rate increase.
carpslidy
Tora
Compared to most countries mortgage rates even after the hike are very low
If they can't handle a 1% increase then they brought a home clearly out of their price range.
Secondly most people are on fixed 10 year rates so expect a glut of foreclosures anytime soon
Hiro
BoJ needs to hike rates to defend the yen and keep inflation expectations anchored to it's 2% target. Higher interest rates hurt with government debt at 250% of GDP, they should be tightening the budget to help reduce inflationary pressure instead of wasting ever more money.
Abe234
SpeedJan. 20 05:30 pm JST
I Guess we will appreciate the time when prices didn’t go up our salary didn’t go up or down and inflation wasn’t anywhere to be seen.
sadly and I’m probably in a minority but inflation is only there to inflate debt away, for them to rinse and repeat it every few years, decades.
over the years and decade, Japan went from also NO sales tax, to 5% sales tax, to 10% sales taxes and they never seemed to pay off the debt. But they kept rolling in the money. And now they want more tax, more inflation, and higher interest rates. Might have been easier to have low interest rates and used the sales tax to pay your debt down, and now you’ve got a demographic bomb on your hands. And you had decades heads-up to sort that out.