The Bank of Japan is anticipated to increase interest rates this Friday, provided there are no unexpected market disruptions after the inauguration of US President-elect Donald Trump.
This adjustment would reduce short-term borrowing costs to heights not witnessed since the global financial crisis of 2008. Such a policy shift would highlight the central bank’s commitment to eventually raising interest rates from the current 0.25% towards the 1% mark, a threshold analysts believe that neither stifle nor overheat Japan’s economy.
The two-day meeting concluded on Friday and as per sources, the Bank of Japan is likely to elevate its short-term policy rate to 0.5% unless Trump’s inaugural address and executive actions create turmoil in the financial markets.
Additionally, the board is expected to revise its price forecasts upward which is fueled by the increasing likelihood that a rise in wages will help Japan consistently achieve the bank’s 2% inflation goal.
If the BOJ proceeds with this hike, it will mark the first increase since July of the previous year. It is a move that had earlier caught traders off guard and led to a major downturn in global markets in early August because of disappointing US employment figures.
To prevent a similar situation from arising, the Bank of Japan has been proactive in indicating its intentions. This comes with clear communications from Governor Kazuo Ueda and his deputy last week mentioning that a rate hike was upcoming.
This led to a rebound in the yen as markets started to factor in an approximately 80% probability of an increase on Friday. There were evident hints of imminent actions last month.
Although the Bank of Japan refrained from increasing rates during the December 18-19 meeting, board member Naoki Tamura has advocated for an increase in rates. Also, other members have acknowledged that conditions were aligning for a potential hike, as it has been revealed in the meeting.
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