The Bank of Japan may raise its policy rate by 25 basis points at next week’s Monetary Policy Meeting, bringing it to 1.25%, reports say. Views have also emerged that rising prices and continued yen depreciation are increasing pressure for further tightening.
The possibility is growing that the Bank of Japan will raise its policy rate by 25 basis points at its Monetary Policy Meeting next week. If implemented, the policy rate would reach 1.25%, its highest level since 1995, and would mark the second rate hike this year.
Reports indicate that the recent rise in consumer prices and the yen’s depreciation are increasing the need for the Bank of Japan to continue normalizing interest rates. Producer price growth is also expected to remain high amid rising energy costs and yen depreciation, and if companies continue passing higher costs on to consumers, upward pressure on consumer prices could persist.
Attention is expected to shift to the pace of further rate hikes after the policy rate reaches 1.25%, as well as the impact on the yen and global capital flows. Higher interest rates would narrow the interest-rate differential with the United States, increasing the possibility of yen appreciation, but volatility is expected to increase depending on currency movements and risk appetite.
There are views that higher interest rates in Japan could also spill over into South Korea’s foreign-exchange and bond markets. During periods of yen appreciation, South Korean exporters’ price competitiveness and the won could be affected, while the concentration of global capital in Japan could also affect markets.