Bank of Japan May Lift Rates to Highest Since 2008

Bank of Japan Set to Raise Interest Rates Amid Market Calm

Tokyo, Japan - Bank of Japan (BOJ) Governor Kazuo Ueda is poised to raise interest rates to their highest level since 2008 on Friday, following a relatively muted response from global financial markets to President Donald Trump's return to the White House.

Ahead of Trump's inauguration, BOJ officials anticipated a rate hike at the end of this week's two-day meeting, contingent on the absence of major negative surprises from the new administration. Government officials have also expressed support for such a move, according to sources.

If implemented, this would mark Ueda's third rate hike in under 12 months, breaking an extended period of zero interest rates that preceded his tenure. A quarter-percentage point increase would also represent the most significant adjustment since 2007, as the BOJ progresses towards normalization, mirroring the Federal Reserve and the European Central Bank's potential pause in their easing cycles.

Despite the expected hike, borrowing costs in Japan will remain among the lowest in developed nations. Accordingly, market participants will be keen to gauge Ueda's perspective on the path forward for further rate increases.

"The BOJ is going to raise rates," said Chotaro Morita, chief strategist at All Nippon Asset Management Co. "There were no major shocks, and no tumbling of stocks on Trump's first day."

The yen gained against the U.S. dollar on Tuesday, defying the broader trend across G-10 currencies. Traders interpreted this as a sign that Trump's initial tariff announcements would not deter the BOJ from raising rates.

The BOJ has signaled its intention to hike rates clearly, with Deputy Governor Ryozo Himino and Governor Ueda reiterating this message in recent statements. Overnight-indexed swaps now price in a greater than 90% probability of a rate increase, up from 41% in December. Approximately three-quarters of economists surveyed expect a similar move on Friday.

"Raising the rate about once every six months will probably be the base case," said Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking. "The BOJ isn't expecting rapid rate hikes."

The central bank is also expected to raise its quarterly inflation projections at this week's gathering, indicating that the cost of living will remain around its target level for the next two years. The latest inflation figures, due out Friday, are anticipated to show an acceleration to 3%.

The government, led by Prime Minister Shigeru Ishiba, has expressed a lack of opposition to a rate hike this month. Big business leaders in Japan have also signaled their support for such a move.

At his post-meeting press conference, Governor Ueda may attempt to keep his options open as he cautiously navigates the BOJ's first normalization efforts in nearly two decades. While 90% of economists believe Japan's economic conditions warrant a rate hike, many also highlight the potential impact of a weak yen on future rate decisions.

"The move toward a strong yen may be limited even with a rate hike," said Daisuke Karakama, chief market economist at Mizuho Bank. "Chances are high that markets will demand another rate hike sooner or later via yen selling."