The Bank of Japan is expected to raise its policy rate by 25 basis points to 1.25 percent amid the impact of geopolitical risks related to energy supplies and domestic economic indicators. If implemented, the move would bring the country’s interest rate to its highest level in 31 years.
While the US-Israel-Iran conflict in the Middle East has increased risks to energy supplies, concerns over energy deliveries through the Strait of Hormuz have intensified inflationary pressures in Japan. Rising energy costs, inflation concerns and the yen’s depreciation have also contributed to expectations of a rate hike.
Japan exceeds inflation and growth forecasts
Japan’s consumer price index rose 1.9 percent year on year in July. This marked the fastest increase in the index since December 2025.
Japan’s economy grew 1.4 percent in the second quarter of the year, outperforming initial estimates. Inflation and growth figures exceeding expectations increased anticipation that the Bank of Japan will pursue a tighter monetary policy.
Bank of Japan Governor Kazuo Ueda could face pressure from Prime Minister Sanae Takaichi’s inner circle, which is focused on supporting economic growth.
Markets will watch guidance more closely than the rate decision
Asian markets analyst Sadi Kaymaz said the Bank of Japan is expected to deliver its third rate hike in less than 10 months. Kaymaz said the forward guidance to be issued on Friday would be more important than the rate decision itself.
Kaymaz said that Bank members view the pace of rate hikes as data-dependent and consider inflation their priority, adding that core inflation accelerated for a second consecutive month to 1.8 percent. Kaymaz said core inflation in Japan could exceed 2.5 percent in the second half of the year.
Kaymaz said nominal wages rose 4.7 percent year on year, adding that the growth indicator was not particularly strong. He said public spending was the main driver of growth, while private consumption remained stagnant.
According to the expectations of a significant proportion of economists, another rate hike could be considered in January 2027. Kaymaz said relatively rapid rate hikes could attract Japanese capital back to the country.
However, Kaymaz said he did not expect Ueda to signal consecutive rate hikes, adding that such a commitment could increase volatility in the yen and bond markets. For this reason, he said he expected the Bank of Japan governor to remain cautious.
