Author: Leika Kihara
TOKYO (Reuters) – The Bank of Japan is expected to raise interest rates on Friday, barring market shocks when U.S. President-elect Donald Trump takes office, a move that would raise short-term borrowing costs to levels not seen since the 2008 global financial crisis.
A policy tightening would underline the central bank’s determination to steadily raise interest rates, now at 0.25%, to near 1% – a level that analysts see as neither cooling nor overheating the Japanese economy.
At a two-day meeting that ends on Friday, the BOJ is likely to raise its short-term interest rate to 0.5% unless Trump’s inauguration speech and executive orders upset financial markets, sources told Reuters.
In the quarterly outlook report, the board is also expected to raise its price forecasts on rising prospects that rising wages will keep Japan on track to sustainably reach the bank’s 2% inflation target.
The BOJ hike would be the first since last July when the move, along with weak US jobs data, shocked traders and sparked a rout in global markets in early August.
Keen to avoid a repeat, the BOJ carefully prepared markets with clear signals from Governor Kazu Ueda and his deputy last week that a rate hike was on the cards. The remarks caused the yen to rally as markets priced around an 80% chance of a rate hike on Friday.
There were also hints of short-term action last month. As the BOJ held off on raising rates at its Dec. 18-19 meeting, sharp-witted committee member Naoki Tamura proposed a rate hike. Some of his colleagues also saw the conditions for an inevitable rate hike, the minutes of the meeting showed.
With policy tightening this week seen as a near certainty, market attention is turning to Ueda’s post-meeting briefing for clues on the timing and pace of subsequent hikes.
With inflation exceeding the BOJ’s 2% target for nearly three years and a weak yen keeping import costs high, Ueda is likely to underline policymakers’ determination to keep raising interest rates.
But there is good reason to be cautious. While the International Monetary Fund raised its forecast for global growth in 2025, Trump’s policies risk destabilizing markets and fueling uncertainty about the outlook for Japan’s export-reliant economy.
Domestic political uncertainty could also rise, as Prime Minister Shigeru Ishiba’s minority coalition could have trouble getting the budget through parliament and winning upper house elections scheduled for July.
The economic damage caused by past unfortunate rate hikes also haunts BOJ policymakers. The BOJ ended quantitative easing in 2006 and pushed short-term rates to 0.5% in 2007, moves that sparked a storm of political criticism for delaying the end of deflation.
The BOJ cut rates from 0.5% to 0.3% in October 2008, then to 0.1% in December of that year, as the global financial crisis pushed Japan into recession. Since then, various unconventional steps have kept borrowing costs close to zero.
“Japan has had persistently low growth rates, inflation rates and lower interest rates. So policymakers, investors and the business community continue to ask – have we really gotten rid of that?” said Jeffrey Young, CEO of DeepMacro.
“The BOJ will have to explain very carefully that they are raising rates to move away from the extraordinary policy that they have adopted.”
