BOJ to signal more rate hikes as yen, politics fuel inflation risks

By Leika Kihara

TOKYO, Jan 20 (Reuters) – The Bank of Japan is expected to raise its growth forecast on Friday and signal its readiness to hike interest rates further, as recent yen falls and prospects of solid wage gains keep policymakers alert to containing inflationary ​pressure.

But BOJ Governor Kazuo Ueda is likely to offer few clues on how soon the central bank could resume rate hikes, a decision complicated ‌by rising bond yields and Prime Minister Sanae Takaichi’s announcement on Monday to call a snap election in February.

Having just raised interest rates to a 30-year high of 0.75% in December, the central ‌bank is set to keep borrowing costs steady at its two-day policy meeting ending on Friday.

Markets will be looking to Ueda’s post-meeting press conference for policy signals, particularly focussing on how the BOJ chief reconciles the need to keep unwelcome yen falls at bay while seeking to avoid further rises in bond yields.

Takaichi on Monday echoed proposals by rival parties to cut Japan’s consumption tax and vowed to end “excessively tight fiscal policy,” heightening the chance of more spending and tax cuts after the election.

TAKAICHI ⁠AND THE RATES CONUNDRUM

While expansionary fiscal steps may push ‌up inflation and give the BOJ another reason to raise rates, a Takaichi victory may embolden her reflationist advisers favouring low rates to underpin a fragile economy, some analysts say.

“So far, the BOJ has maintained a negative stance toward consecutive rate hikes” ‍on concerns over the impact on Japan’s financial system and pressure from Takaichi’s administration, said Ayako Fujita, Japan chief economist at JPMorgan Securities.

“Whether the recent yen depreciation will prompt a change in this stance is a key point to watch,” she said.

Concern over Japan’s worsening finances has driven bond yields sharply higher since early November with the 10-year Japanese government ​bond yield hitting a 27-year high of 2.30% on Tuesday.

Moreover, since fiscal and monetary dove Takaichi became prime minister in October, the yen has fallen ‌about 8% against the dollar to briefly hit an 18-month low of 159.45 last week, its lowest level since Japan last intervened in July 2024.

The yen bounced back somewhat and stood around 158.18 on Tuesday. But the currency’s downtrend, which boosts import costs and broader consumer prices, has led to market views the BOJ could speed up rate hikes to forestall the risk of too-high inflation.

AN APRIL RATE HIKE CANNOT BE RULED OUT

Sources have told Reuters some BOJ policymakers see scope to raise rates sooner than markets expect with April a distinct possibility, as a sliding yen risks adding to already broadening inflationary pressure.

The central bank ended a ⁠decade-long, massive stimulus in 2024 followed by several sequences of hikes in its short-term policy ​rate including one to 0.75% from 0.5% last month.

Analysts polled by Reuters expect the BOJ to ​wait until July before raising rates again, with more than 75% of them expecting it to climb to 1% or higher by September.

The BOJ’s quarterly outlook report, due on Friday, will likely highlight the bank’s growing conviction that Japan is on course to ‍meet the conditions for further rate increases.

In ⁠the report, the BOJ is expected to revise up its economic forecast for fiscal 2026 from the 0.7% growth rate expected three months ago, reflecting the boost from the government’s stimulus package and the fading impact of U.S. tariffs, the sources said.

The BOJ may slightly revise up its ⁠fiscal 2026 core consumer inflation forecast from 1.8% projected three months ago, with the effect of government steps to curb utility bills offset by rising goods prices and steady wage gains, they ‌said.

The central bank is expected to maintain its projection that inflation in Japan will durably hit 2% around October, or the latter half ‌of the fiscal year starting in April.

(Reporting by Leika KiharaEditing by Shri Navaratnam)