The Bank of Japan (BoJ) is expected to hold rates at 0.5% during its next meeting on Wednesday, March 19. The expected rate hold comes from growing uncertainties in the global economy, caused by escalating trade wars and rising inflation.
The BoJ remains cautious over interest rate changes despite strong economic data.
Economic Performance
Japan’s economy has shown mixed numbers in its economic performance, with inflation numbers reaching a 2-year high of 4% in January 2025. Core CPI for February is expected to decline to 2.9% from January’s 3.2%. ⁽¹⁾
Wage data for January showed strong numbers, where base pay for Japanese workers jumped by 3.1% YoY but more importantly, following two consecutive months of gains and signals that inflation has outpaced growth. ⁽²⁾
Japan’s economy grew by 2.2% QoQ in Q4 2024, which was less than estimated at 2.8%. The revised GDP figures highlight small weakness in the Japanese economy even as it continues to expand moderately overall.
A slowdown in spending by households may cause the central bank to be more cautious as it looks for opportunities to keep dialing back easy monetary settings with gradual rate hikes. ⁽³⁾
External risks such as escalating trade wars between the US and its trading partners create more uncertainty in the global economy and could impact Japan’s economy which relies on imported raw materials and exports of technology products. ⁽⁴⁾
Rising wages could lead to more spending from higher income households which could support domestic demand.
The BoJ will start to reduce its bond holding in order to counter balance sheet concerns and to ensure financial stability. ⁽⁵⁾
What To Expect from the March Meeting
While traders and investors expect a rate hold at 0.5%, high inflation and wage growth support a hawkish stance due to global uncertainties caused by trade wars could cause the BoJ to act cautiously on interest rates. The central bank will continue to monitor economic data before making policy shifts. ⁽⁶⁾
Outlook and Speculation of Rate Hikes
The Bank of Japan is expected to continue to gradually hike interest rates. Traders and investors expect a rate hike to 0.75% in Q3 2025. The central bank will continue to monitor growth and inflation forecasts in its April and May meetings, which could influence future policy decisions. ⁽⁷⁾
Rising bets of a July rate hike have also driven Japanese Government Bond (JGB) yields higher. Higher JGB yields and a stronger Yen have fueled speculation about another Yen carry trade unwind.
Despite the threat of a Yen reverse carry trade which could trigger a market disruption, BoJ Governor Kazuo Ueda remained resolute in raising interest rates. ⁽⁸⁾
The BoJ will be managing its balance sheet reduction while ensuring liquidity remains adequate to support economic growth. The central bank’s exit strategy from its ultra-loose monetary policy will be closely watched by financial markets and policymakers worldwide.
