Bank of Japan gears toward rate hike amid rising inflation pressures

​​​​​​​By Mahmut Cil, Ali Canberk Ozbugutu, and Emir Yildirim

ISTANBUL (AA) - The Bank of Japan (BoJ) is expected to raise its policy rate from 0.5% to 0.75% at a meeting Friday, marking its first policy adjustment since January as inflationary pressures persist, said economists.

Concerns over rising prices have been fueled by new Prime Minister Sanae Takaichi’s expansionary stance on monetary policy, which analysts said could add to upward pressure on inflation.

The BoJ has said it will keep its inflation forecasts unchanged, reiterating that it will continue raising borrowing costs if economic developments align with its projections.

The central bank forecasts core inflation of 2.7% in fiscal 2025 and 1.8% in fiscal 2026.

Japan’s national core inflation rose 3% year-on-year in October, exceeding the BoJ’s year-end estimate.

Marcel Thieliant, chief economist for Asia-Pacific at Capital Economics, told Anadolu that the BoJ is almost certain to raise its policy rate at Friday’s meeting.

Thieliant said the benchmark rate is likely to reach 1.75% by the end of 2027.

He said the BoJ had previously been expected to wait until January to better assess wage growth, but comments last week by Governor Kazuo Ueda pointing to sustained wage increases shifted expectations toward an earlier hike.

Thieliant said the BoJ is expected to lift the policy rate to 0.75% this week, though the inflation outlook remains unusually uncertain.

He said reductions in gas taxes and energy subsidies could push headline inflation down to around 1% by January, while falling crude oil prices and a stronger yen, potentially reaching 145 against the dollar by the end of 2027, could further dampen inflationary pressure from energy costs.

Thieliant noted that inflation, excluding fresh food and energy, stood at 3.1% in October, but said it may not remain at that level through 2026.

He added that the risk of a recession derailing the BoJ’s tightening path appears limited, as corporate profits are rising and other major central banks are easing policies, leaving Japanese firms better positioned to absorb higher borrowing costs.

Thieliant described the housing market as Japan’s economic weak point, noting that housing prices have accelerated since the BoJ began hiking rates in March 2024.

He said the doubling of housing prices relative to wages since 2012 is unsustainable, warning that a downturn in the real estate sector could weigh on broader economic activity.

Berna Onsel, an investment finance strategy and advisory specialist, told Anadolu that a 25-basis-point hike would push the BoJ’s policy rate to its highest in nearly 30 years.

Onsel said the BoJ’s prolonged “ultra-loose” monetary policy had made the yen a key funding currency for carry trades, but the central bank’s first move away from that stance in August 2024 triggered sharp market adjustments.

“The BoJ hiking its rates while the Fed is cutting them will keep impacting carry trade positions; however, following the initial shock in August 2024 and the subsequent stabilization, fluctuations in the coming period are expected to be largely limited,” she said.

“Rate differentials between the BoJ and the Fed, or between the BoJ and the European Central Bank (ECB), as well as with emerging market interest rates, will be a key indicator of global risk appetite and the direction of capital flows in short and medium to long term,” she added.

Onsel said that as borrowing in the yen becomes more expensive, capital flows to the US, Europe and emerging markets through carry trades are likely to slow gradually.

She added that the BoJ’s rate hike, combined with the Fed’s easing cycle, could lead to a modest shift in favor of the Japanese yen against the US dollar in the period ahead.