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- The Bank of Japan will meet on Friday, January 23, where they are expected to hold rates at 0.75%, addressing yen weakness with a possible FX market intervention.
- On the same day, Prime Minister Takaichi will dissolve the lower house of parliament to make way for a snap election on February 8, seeking a public mandate for her policy goals.
- Japan’s finance minister Katayama is becoming more concerned about the weakness in the yen, possibly stepping up her warnings and reminding markets of the intervention that occurred in 2022.
- The Bank of Japan will update its quarterly economic outlook, where Governor Ueda’s comments will be monitored by traders during the press conference for policy signals.
The Bank of Japan faces a delicate balancing act at its policy meeting on Friday, as it navigates between a weakening yen, rising political pressures, and inflation concerns.
While the central bank is widely expected to keep interest rates unchanged on Friday, markets will closely watch Governor Kazuo Ueda’s signals about future rate hikes amid currency volatility that has brought the yen dangerously close to intervention levels.
The timing is particularly sensitive, coinciding with Prime Minister Sanae Takaichi’s snap election call and her ambitious fiscal spending plans that have pressured the currency and bond markets even more.
BOJ Set to Hold Rates Despite Yen Pressure
The Bank of Japan is expected to keep interest rates on hold at 0.75%, offering little support for the yen and keeping traders on alert for a potential intervention in the foreign exchange market.
The focus will be on Governor Ueda, whose comments could turn more hawkish and help support the yen as it weakens toward levels that previously triggered intervention. BOJ officials are focusing on the impact of the currency on inflation, while more weakness in the yen could speed up the pace of future rate hikes. ⁽¹⁾
Political Uncertainty Weighs on Currency
On the same day as the BOJ’s decision, Prime Minister Sanae Takaichi will dissolve the lower house of parliament to make way for a snap election on February 8.
Her political strategy has been crystal clear: spend big, cut taxes, and ride a wave of economic stimulus to electoral victory.
Markets believe she’ll succeed, and they’re already pricing in the outcome. The yen has nose-dived, government bonds have sold off, but stocks have soared to record highs on expectations of massive fiscal stimulus. ⁽²⁾
Takaichi doubled down, promising to cut Japan’s consumption tax and end what she called “excessively tight fiscal policy.” For currency traders, the message was clear. More spending is coming, and the yen will pay the price. ⁽³⁾
When Takaichi took office in October 2025, the yen weakened almost 10% against the US dollar. Yen weakness has caused Japanese consumers to pay more for imported goods, while businesses are struggling with higher production costs.
Market Expectations and Intervention Risks
Despite being the only G10 central bank actively raising rates, two hikes were delivered last year, but the BOJ hasn’t been able to stop the yen from bleeding. Financial markets are pricing in a 50.1% chance of a rate hike from the BOJ in April, up from December’s 38% chance. ⁽⁴⁾
Bank of Japan Interest Rate Probabilities / Source: LSEG Workspace
Finance minister Satsuki Katayama and top currency official Atsushi Mimura suggested last week that authorities are becoming increasingly concerned with the yen’s weakness by stepping up verbal warnings. ⁽⁵⁾
Traders remember what happened in September 2022. Previous BOJ Governor Kuroda held rates steady and made comments that triggered a fresh wave of yen selling. Within an hour, Japan intervened in the foreign exchange market for the first time since 1998, spending billions to support the yen. ⁽⁶⁾
Markets will focus on Ueda’s post-meeting press conference for clues on policy, especially how the BOJ plans to limit excessive yen weakness without pushing bond yields higher.
The decision will not just be monitored by traders, but also by Treasury Secretary Scott Bessent. He suggested that Japan should stay on track for normalization, mentioning the need for “sound formulation and communication of monetary policy.” He expressed similar sentiments in October. ⁽⁷⁾
Updated Economic Outlook and Fiscal Concerns
The BOJ will update its quarterly outlook, alongside forecast upgrades of economic growth, in light of the large stimulus package that Takaichi pushed through the Japanese parliament in December.
The BOJ also signaled that it is still committed to raising interest rates further, as recent yen declines and prospects of solid wage gains keep policymakers alert to containing inflationary pressure. ⁽⁸⁾
In addition to the stimulus package, Takaichi also compiled a full-year budget for fiscal 2026 that is the biggest ever, tapping into tax revenue that has risen thanks to inflation. As a result, the prime minister is expected to reduce the government debt-to-GDP ratio. ⁽⁹⁾
