The Bank of Japan (BOJ) is widely expected to keep its benchmark interest rate unchanged at 1% on Friday, although investors will be watching closely for signals that further policy tightening remains on the table after Japan intervened to support the weakening yen.
The policy decision comes after Japan conducted yen-buying, US dollar-selling intervention in New York markets on Thursday, according to a market source cited by Reuters. The move lifted the currency from four-decade lows just hours before the BOJ concludes its two-day monetary policy meeting.
While the central bank is expected to leave rates unchanged after raising them in June, some analysts believe board member Hajime Takata could dissent by proposing a 25-basis-point increase to 1.25%.
Attention is expected to centre on the BOJ’s quarterly outlook report and Governor Kazuo Ueda’s post-meeting briefing for clues on the timing of the next rate hike.
According to Reuters, the BOJ is expected to raise its economic growth forecast for fiscal 2026 as concerns over the impact of the Middle East conflict ease. At the same time, it is likely to trim its inflation outlook due to government subsidies and lower oil prices, although the downgrade is expected to be modest given continued pressure from higher import costs caused by the weak yen.
“Although inflation forecasts may be revised lower, stronger growth would reinforce confidence that the economy can withstand further policy normalisation,” said SuMi Trust senior economist Kei Fujimoto.
“My baseline scenario remains that the BOJ raises rates roughly once every six months. However, given the improving growth backdrop, together with accelerating import-price inflation, the possibility of a faster pace of tightening cannot be ruled out,” he said.
The BOJ’s gradual pace of policy normalisation has been blamed for driving the yen to its weakest level in four decades, increasing import costs and adding pressure on households and retailers.
Most analysts surveyed by Reuters expect the BOJ to raise interest rates again to 1.25% before the end of the year.
Governor Ueda is expected to face pressure to deliver a hawkish message to discourage further yen weakness, particularly as prospects of additional US interest rate hikes continue to weigh on the Japanese currency.
However, analysts said the central bank may also remain cautious amid political pressure for accommodative policy and concerns over the economic impact of a recent 7.1-magnitude earthquake in Kumamoto, home to several major manufacturers and semiconductor facilities.
Japan’s core consumer inflation stood at 1.6% in June, remaining below the BOJ’s 2% target for a fifth consecutive month. However, economists expect inflation to move back above the target later this year as higher producer costs filter through to consumers.
Reuters
