Factbox – How much higher could Bank of Japan rates go this week? By Reuters

By Leica Kihara

(Reuters) – The Bank of Japan wrapped up its first policy meeting of the year on Friday, the outcome of which will be announced days after U.S. President Donald Trump took office.

Here’s a guide to what to expect and why a BOJ rate review is needed:

When will the BoJ meeting take place?

The BOJ board, which sets monetary policy, is holding a two-day meeting that ends on Friday. He will announce his decision after completing the discussions.

The BOJ ended years of negative interest rates in March and raised its short-term policy rate to 0.25% in July. He indicated he is ready to hike again if wages and prices move as planned.

Is the Fed going to raise interest rates?

There is a growing belief at the BOJ that conditions for another hike are on the way. The economy continues to expand modestly, and inflation has been above the target of 2 percent for three years.

Companies will continue to pass on rising raw material and labor costs to buyers, suggesting that the BOJ board may revise its inflation forecast in its quarterly outlook report after the meeting.

More importantly, there are growing signs that firms will offer higher pay increases for the third year in a row than the unions’ annual wage negotiations that begin in March.

The BOJ’s regional branch manager pay hikes are being extended to companies of all sizes and sectors, meeting a key condition for raising interest rates. As such, the central bank may raise rates to 0.5% on Friday.

What are BoJ policy makers up to now?

The BOJ’s outlook on wages and U.S. policy has been closely watched by markets after Governor Kazuo Ueda last month cited uncertainty as a reason for curbing rate hikes.

Speaking on January 14, Deputy Governor Ryozo Himino said that wage growth will remain strong this year. A day later, Ueda echoed the BOJ’s optimism that Japan is on track to sustainably hit its inflation target.

Both Himino and Ueda said the BOJ will argue for raising rates this month, indicating the possibility of a hike.

What can answer policy makers?

With expectations of continued wage hikes rising, the only obstacles left to raising rates are fears of a Trump bombshell and rising financial markets.

Lt. Gov. Himino said he would seek clues on the “balance and timing” of the president’s new policy actions, as well as anything that hasn’t yet been announced by Trump.

A global rally in stocks this week has fueled policymakers’ fears that Trump’s tariff threat could cause market volatility, raising the possibility of a price hike on Friday.

How will the markets react to the Japanese rate hike?

Bets on further rate cuts by the US Federal Reserve mean the US-Japan interest rate differential will remain wide, putting the yen under downward pressure.

A rate hike by the BOJ could briefly boost the yen. But Ueda’s gains could be short-lived unless Ueda makes bullish comments about his outlook in his post-meeting news briefing.

What else should markets be looking for?

The BOJ releases its quarterly estimates with updated growth and inflation forecasts, which reflect the board’s expectations for Japan to hit the 2% inflation target sustainably. This will affect the pace of future price increases.

Yuda may hint at the timing and pace of further hikes in his post-meeting briefing.

The main thing will be the attitude of the ruler on the extent of Japan’s neutrality. BOJ staff estimates show the inflation-adjusted real neutral rate to be in the range of -1% to +0.5%. That means if inflation can reach the BOJ’s 2% target, it could raise the short-term rate to at least 1% without slowing growth.

Based on projections made in October, the BOJ expects short-term rates to approach what appears to be neutral in the “last half of the three-year projection horizon” by March 2027, suggesting some time after October 2025.

While Hawkish board member Naoki Tamura projected the neutrality rate to be around 1%, Yuda said it was difficult to come up with reliable estimates due to the lack of data.

What’s next?

Many analysts expect the BOJ to continue raising rates roughly twice a year. If the BOJ raises rates on Friday, it could remain in a holding pattern until the latter half of this year, when the impact of Trump’s policies becomes clearer.

Domestic politics will complicate the timing of the BOJ’s rate hike with upper house elections scheduled for July, where Prime Minister Shigeru Ishiba’s minority coalition may struggle to win votes. The BOJ may choose to refrain from changing policy until the political dust settles.