BOJ to raise rates by 25bp to 1.25% at next week's regular meeting, expected to reach 31-year high

The Bank of Japan will hold its monetary policy meeting on the 17th and 18th next week. Market participants are increasingly expecting the BOJ to raise its policy rate again at the meeting, with a 0.25-percentage-point hike to 1.25% seen as the most likely outcome. If implemented, the BOJ's policy rate would reach its highest level in 31 years, marking the second rate hike in three months following the increase from 0.0% in June.

Within the BOJ, the view is gaining ground that conditions for another rate hike are gradually falling into place as the Japanese economy recovers moderately and upward price pressures build. Officials have indicated that even if the policy rate is raised to 1.25%, financial conditions would remain accommodative and the restraint on economic activity would be limited.

The yen has been recovering, and lower import costs are expected to ease price pressures. However, some market participants believe vigilance over upside inflation risks remains warranted, given the yen's previous declines and the renewed rise in fuel prices. The statement and the governor's press conference after the meeting may contain signals pointing to further rate hikes.

Board member Masu Kazuyuki (増一行) said that, regarding next week's meeting, he wanted to "carefully examine and verify" factors including foreign exchange rates, crude oil prices and international food prices before discussing policy, but did not explicitly express support for a rate hike. He indicated that while inflation is assessed at close to 2% over the long term, a large 0.5-percentage-point hike is not necessary at present.

The market is pricing in a rate hike by the BOJ next week as almost certain, with interest-rate swap prices implying a probability of around 97%. The statement and the governor's press conference next week will likely be key to interpreting the future policy path.