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- The Bank of Japan is expected to raise rates by 25 bps to 0.75%, set to mark its second hike this year.
- Inflation staying above the BOJ’s 2% target supports further tightening, but policymakers are cautious about sending overly hawkish signals that could weaken the yen, lift import costs, and add to inflation pressures.
- Markets are focused on Ueda’s forward guidance, the pace toward the neutral rate, and how future policy moves will balance growth, wages, and yen stability.
Heading into the Bank of Japan meeting on Friday, markets are confident that the central bank will raise interest rates by 25 basis points to 0.75%. Traders are also pricing in more cuts ahead, with rates expected to hit at least 1% by October next year.
After the Bank of Japan already raised rates back in January, Friday’s expected rate jump would mark the second one this year.
Prime Minister Sanae Takaichi’s government is expected to tolerate the decision with inflation risks and a weak yen in mind.
After the central bank’s October meeting, BOJ Governor Ueda said early signals from next spring’s wage talks would be crucial in deciding when to raise rates.
Interest Rate Outlook and Policy Expectations
With persistent food cost pressures keeping inflation above the 2% target, the BOJ is now widely expected to hike. The central bank is also expected to continue raising rates, but at a pace dependent on how the economy will perform based on each rate hike.
This move would show that the BOJ believes Japan is finally achieving steady inflation and wage growth, which it sees as necessary before raising interest rates.
The median forecast for interest rates at the end of 2026 was 1.00%, unchanged from last month’s survey. ⁽¹⁾
Yen Stability Risks and Market Pressures
BOJ Governor Ueda is also facing pressure to stop aggressive hawkish signals to avoid triggering a major decline in the Japanese yen that could push up import prices and inflation.
Japan stands ready to intervene in the currency market to prevent abrupt and sharp swings in the yen, a sign the administration and BOJ share their aversion to excessive yen declines.
Wages, Inflation, and Cost Pressures
The rise in wages driven by labor shortages are likely to continue, but companies are hesitant to take action, alongside other pressures such as tariffs and sour relationships between Japan and China. ⁽²⁾
A weak yen helps exporters, but it raises import costs, forcing retailers to increase prices while putting more pressure on households already facing falling real wages. But the number of price hikes could spike if yen declines continue, heightening inflationary risks and complicating the BOJ’s rate-hike decisions next year. ⁽³⁾
ETF Offloading
Since the September decision, the BOJ has announced to sell its ETF holdings in January at a slow pace to avoid panic in the markets. The holdings had a market value of ¥83 trillion ($534 billion) at the end of September and a book value of ¥37.1 trillion ($238 billion), according to the central bank. ⁽⁴⁾
The BOJ wants its asset sales to have little market impact, similar to how it quietly sold bank shares in the 2000s, completing the process over about a decade without disrupting markets. ⁽⁵⁾
Forward Guidance and Path to Neutral Rate
BOJ policymakers have signaled caution on making new changes to monetary policy as they prepare to hike rates closer to levels deemed neutral to the economy, which the central bank estimates as in a range of 1% to 2.5%. ⁽⁶⁾
With Ueda having essentially pre-committed to a December hike in a speech earlier this month, markets are focusing on what signals the governor will drop on the future rate-hike path at his post-meeting news conference.
