The Bank of Japan is expected to decide on raising interest rates on Friday, January 24, if there are no global shocks on the market by then.
According to media reports, the mentioned decision by the central bank of the Asian country will lift the cost of short-term borrowing to a level not seen since the financial crisis of 2008.
The expected increase in interest rates will underline the Bank of Japan’s determination to steadily raise borrowing cost, which is currently at 0.25%, to almost 1%, an indicator that experts believe does not cool or overheat the country’s economy.
A two-day meeting of the mentioned financial regulator on monetary policy issues will end on Friday. The media, citing insiders, reported that on January 24, the Bank of Japan is likely to announce an increase in its short-term policy rate to 0.5%. At the same time, in this case, there are concerns that the President of the United States, Donald Trump, whose inauguration took place on Monday, January 20, will make statements or sign executive orders before Friday, which will significantly change the situation in the financial markets.
It is also expected that a quarterly outlook report by the board of the Bank of Japan to raise its price forecasts against the background of increasing prospects that broader wage gains will contribute to the sustainable achievement of the financial regulator’s inflation target of 2%.
It is worth mentioning that the last time the central bank of an Asian country raised the cost of borrowing was in July. At that time, this decision, along with factors such as weak jobs data in the United States and the realization by investors that the returns from financial injections into artificial intelligence would not be as fast as they initially expected, provoked a rout in global markets. Traders were shocked by the circumstances of the mentioned reality configuration.
To avoid a repeat of the situation that occurred last summer, the Bank of Japan has, in a sense, begun to prepare markets for its new decision in the context of monetary policy changes. The governor of the financial institution Kazuo Ueda and his deputy last week signaled that an increase in borrowing costs is approaching. Against the background of relevant hints, which are not some kind of semi-abstract statements about strictly theoretical probabilities without any specifics, being extremely clear statements of intent, the yen rebounded. Markets are currently estimating a roughly 80% chance that the Bank of Japan will decide to raise borrowing costs on Friday.
Last month, there were also hints of near-term actions by the Asian country’s financial regulator. In December, the Bank of Japan refrained from raising interest rates. At that time, board member Naoki Tamura, who adheres to the so-called hawkish position, suggested deciding on the increase in borrowing costs. The minutes of the meeting show that some of his colleagues agreed that conditions have formed in the space of Japan’s economic system for an early raising of interest rates.
Currently, many experts characterize an increase in the cost of borrowing in an Asian country not as a probability with a certain degree of realism, but as an inevitability, the materialization of which is obvious in the context of the current realities. Markets are awaiting Kazuo Ueda’s briefing to receive information on the timing and pace of a subsequent interest rate hike in Japan.
In the Asian country, inflation has exceeded the financial regulator’s target of 2% for almost three years. A weak yen has kept import costs elevated. The media predict that Kazuo Ueda will announce the determination of Bank of Japan officials to continue raising interest rates.
It is worth noting that at the same time, the financial regulator of the Asian country has a reason to take a cautious approach in implementing its intentions to gradually tighten monetary policy. The International Monetary Fund last week revised up its forecast for global economic growth for 2025. At the same time, a certain policy configuration of the Donald Trump administration may become a factor in destabilizing markets on a world scale. In this context, it is worth mentioning Mr. Trump’s repeatedly stated intention to raise tariffs on imported goods. Economists warn that the implementation of appropriate measures will significantly increase tensions in the global trade space. At the same time, the tightening of the tariff policy of the United States will become a painful factor affecting economic systems that are heavily dependent on exports. It is worth noting that external shipments of goods and services are critically important for Japan’s gross domestic product (GDP). Tokyo is not a geopolitical rival of Washington, which is why its prospects in the context of the expected tightening of the tariff policy of the United States are not as pessimistic as, for example, Beijing’s. At the same time, Japan will still face significant consequences if Donald Trump’s intention to increase tariffs is implemented. The United States is the world’s largest economy, which is why any tightening of Washington’s trade policy will have a massive impact. South Korea has already announced its intention to take measures in preparation for Donald Trump’s decision to raise tariffs on imported goods.
It is worth noting that the tightening of Washington’s trade policy may also become a factor in increasing uncertainty about the prospects for Japan’s economy.
Moreover, Tokyo may face internal instability in the foreseeable future. The corresponding probability is related to the fact that Prime Minister Shigeru Ishiba’s minority coalition may struggle to pass a budget through parliament and win an upper house election scheduled in July. An unstable political situation is a priori a negative factor in terms of its impact on the state of affairs in the economy.
It is also worth noting that the Bank of Japan has a negative experience of raising interest rates. In 2006, the financial institution stopped quantitative easing monetary policy and increased the short-term cost of borrowing to 0.5% in 2007. Against this background, the Bank of Japan has faced a wave of political criticism. Statements were made regarding the financial institution, reproaching it for delaying an end to inflation.
In October 2008, the Bank of Japan cut interest rates from 0.5% to 0.3%. In December of the same year, the financial institution lowered the cost of borrowing to 0.1%. During this period, the global financial crisis triggered the realization of a recession scenario in the space of Japan’s economic system. Since then, the financial institution has kept interest rates near zero through various unconventional measures.
Japan has experienced slow economic growth for a long time. Interest rates in the Asian country are also not high, and this has already become something of a status quo in the context of the monetary policy of the local financial regulator. Now the Bank of Japan is ready to raise the cost of borrowing. At the same time, it is still unknown how far the experience of the past years is and to what extent it is likely to be repeated.
