Kihara Laika
TOKYO, Jan 20 (Reuters) – The Bank of Japan is expected to raise its economic growth forecast on Friday and signal its readiness to raise interest rates further, as a recent fall in the yen and the prospect of solid wage growth keep policymakers wary of curbing inflationary pressures.
But Bank of Japan Governor Kazuo Ueda may not provide clues on how soon the central bank will resume raising interest rates, a decision complicated by rising bond yields and Prime Minister Sanae Takaichi’s announcement on Monday to call a snap election in February.
The central bank just raised interest rates to a 30-year high of 0.75% in December and plans to keep borrowing costs steady at a two-day policy meeting that ends on Friday.
Markets will be watching for Ueda’s policy signals at his post-meeting press conference, especially on how the Bank of Japan governor coordinates efforts to stem an unwelcome yen slide while seeking to avoid a further rise in bond yields.
Takaichi on Monday responded to rival proposals to cut Japan’s consumption tax and vowed to end “overly tight fiscal policy,” raising the possibility of more spending and tax cuts after the election.
High market and rate conundrum
Some analysts said that while expansionary fiscal measures could push up inflation and give the Bank of Japan another reason to raise interest rates, a victory for Koichi could encourage her reflationist advisers to support low interest rates to shore up the fragile economy.
Ayako Fujita, chief economist at JPMorgan Securities Japan, said that “so far, the Bank of Japan has maintained a negative stance on consecutive interest rate hikes” due to concerns about the impact on Japan’s financial system and pressure from the city government.
“Whether the recent yen depreciation will prompt a change in this stance is a key point to watch,” she said.
Concerns about Japan’s deteriorating fiscal situation have pushed bond yields sharply higher since early November, with Japan’s 10-year government bond yield hitting a 27-year high of 2.30% on Tuesday.
In addition, the yen has fallen about 8% against the dollar since fiscal and monetary doves took office as prime minister in October, hitting an 18-month low of 159.45 last week, the lowest level since Japan’s last intervention in July 2024.
The yen rebounded on Tuesday, standing near 158.18. But the yen’s falling trend has pushed up import costs and broader consumer prices, leading to speculation that the Bank of Japan may speed up interest rate hikes to prevent the risk of excessive inflation.
Do not rule out the possibility of raising interest rates in April
