The Bank of Japan (BOJ) is widely anticipated to keep its short-term interest rates steady at 1% following its two-day meeting concluding Friday. This decision comes after a rate hike in June, which brought rates to a 31-year high. However, the central bank is expected to deliver a hawkish signal, indicating a strong resolve to continue raising borrowing costs. This stance is driven by mounting price pressures stemming from a depreciating yen and the impact of the Middle East conflict on energy prices, which threaten to push underlying inflation above the BOJ's 2% target.
Analysts polled by Reuters largely predict another rate hike to 1.25% by the end of the year, with some suggesting it could occur as early as October. Mitsubishi UFJ Morgan Stanley Securities, for instance, expects the next increase in December, but acknowledges that an earlier hike in September or October is possible if the BOJ becomes more concerned about inflation overshooting or if a continued weak yen prompts government intervention. The slow pace of rate increases has been a contributing factor to the yen's depreciation, hitting a 40-year low and subsequently increasing import costs for Japanese households and retailers.
While core consumer inflation in June was 1.6%, remaining below the BOJ's 2% target for the fifth consecutive month, analysts foresee it climbing back above 2% later this year as surging producer prices eventually impact the broader economy. Markets are closely monitoring the BOJ's quarterly outlook report and Governor Kazuo Ueda's post-meeting news conference for clearer indications on the timing and pace of future rate hikes. The BOJ is also expected to maintain its warning about the risk of inflation overshooting its target, despite potential downward revisions to its inflation forecast due to subsidies and a decrease in oil costs from April levels, which may be offset by volatile oil markets and weak yen-driven import costs. Some hawkish board members, such as Hajime Takata, may dissent and advocate for an immediate hike to 1.25%.
