BOJ signals readiness for more rate hikes as yen weakness fuels inflation risks

BOJ Signals Potential Rate Hike

The BOJ is expected to maintain the policy rate at 0.75% while signaling a potential tightening bias as yen weakness and robust wage growth escalate inflation risks. Market participants anticipate a revision of the growth outlook for fiscal 2026, aided by government stimulus and reduced drag from US tariffs.

Yen's Weakness and Inflation Link

The yen has depreciated roughly 8% over the past few months, hitting an 18-month low near 159.5 last week. This decline increases import costs and puts pressure on consumer prices, complicating the path for the BOJ to achieve its inflation target.

Political Climate's Impact

Political factors further complicate the messaging from the BOJ, especially with Prime Minister Sanae Takaichi announcing a snap election for February. The BOJ faces the challenge of controlling yen depreciation without triggering additional increases in bond yields. Traders look to Governor Ueda’s upcoming briefing for clues on monetary policy direction as April's rate hike could be in play if yen weakness persists.

Market Reactions and Outlook

Most analysts forecast the next rate hike around July, yet the dynamics surrounding currency movements are deemed crucial to the BOJ's next steps. The market's sensitivity to foreign exchange dynamics is becoming more pronounced in shaping monetary policy.