The Bank of Japan is set to raise rates to their highest in 17 years.
By Leica Kihara
TOKYO (Reuters) – The Bank of Japan is expected to raise interest rates on Friday, barring any market shocks when U.S. President Donald Trump takes office. .
The policy tightening underscores the central bank’s commitment to steadily raising interest rates by 0.25% to a range of around 1% — a level analysts see as neither cooling nor heating up Japan’s economy.
At the two-day meeting that ends on Friday, the BOJ may raise its short-term policy rate to 0.5% unless Trump’s opening speech and executive order boosts financial markets, sources told Reuters.
In its quarterly outlook report, the board is expected to raise its price forecast on growing hopes that Japan will continue to beat the Bank of Japan’s 2% inflation target.
The BOJ’s hike will be the first since July last year, when the move, coupled with weak US jobs data, spooked traders and sent global markets into a tailspin in early August.
Keen to avoid a repeat, the BOJ was carefully prepared by Governor Kazuo Ueda and his deputy last week for markets with clear signs that a rate hike was on the cards. The comments led to a rebound in the yen on Friday, as prices increased by about 80%.
There were also hints of imminent action last month. While the BOJ held off on raising rates at its Dec. 18-19 meeting, hawkish board member Naoki Tamura proposed raising rates. Some of his colleagues also saw conditions falling for a near-term increase, the minutes of the meeting showed.
With policy tightening seen as a near-certainty this week, market attention is shifting to U.E.A.’s post-meeting briefing on the timing and pace of subsequent hikes.
With inflation running above the BOJ’s 2 percent target for three years and the weak yen keeping import costs high, the U.S. could weigh on policymakers’ decision to continue raising interest rates.
But there is good reason to tread carefully. The International Monetary Fund If he raises his forecast for global growth in 2025, Trump’s policies risk destabilizing markets and creating uncertainty about the outlook for Japan’s export-dependent economy.
Domestic political unrest is also likely to increase as Prime Minister Shigeru Ishiba’s minority coalition may struggle to pass the Upper House elections scheduled for July.
The economic damage caused by the ill-fated rate hikes of the past will also haunt BOJ policymakers. In 2015, the BOJ He ended quantitative easing in 2006 and pushed short-term rates to 0.5% in 2007, prompting political criticism that he had delayed deflation.