Rising risks to energy supplies and mounting inflationary pressure have strengthened expectations that the Bank of Japan will raise its policy rate by 25 basis points to 1.25%. If the increase goes ahead, the rate will reach its highest level in 31 years.
The US-Israel-Iran conflict in the Middle East has increased energy supply risks amid concerns over energy shipments through the Strait of Hormuz. Rising energy costs, inflation concerns and the yen’s depreciation have also influenced expectations of a rate hike in Japan.
Price and growth forecasts exceeded
Japan’s consumer price index rose 1.9% year on year in July. This marked the fastest increase since December 2025.
The Japanese economy grew 1.4% in the second quarter, outperforming initial estimates. Inflation and growth data exceeding expectations strengthened projections that the Bank of Japan will move toward a tighter monetary policy.
Bank of Japan Governor Kazuo Ueda could face pressure from figures close to Prime Minister Sanae Takaichi, who is focused on supporting economic growth.
Markets will focus on forward guidance more than the decision
Asia 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.
According to Kaymaz, bank members view the pace of rate hikes as data-dependent and consider inflation their priority. Kaymaz said core inflation had accelerated for a second consecutive month to 1.8%, adding that core inflation in Japan could exceed 2.5% in the second half of the year.
Kaymaz said nominal wages had risen 4.7% year on year and that the growth indicator was not particularly strong. He noted that public spending was the main driver of growth, while private consumption remained stagnant.
According to the expectations of a significant number of economists, another rate hike could come under consideration in January 2027. Kaymaz said relatively rapid rate hikes could attract Japanese capital back to the country.
Kaymaz also said he did not expect Ueda to signal consecutive rate hikes. He said such a commitment could increase volatility in the yen and bond markets, adding that the governor would therefore remain cautious.
