Bank of Japan to lift rates to 31-year high amid rising inflation risks

The Bank of Japan is set to increase its benchmark rate to 1.25% on Friday, marking the first rise in three months and the highest level since the early 1990s. The move aligns the BOJ with recent policy tightening by the European Central Bank and an expected rate hike by the U.S. Federal Reserve later in the week. The 25-basis-point adjustment brings the rate into the central bank’s estimated neutral band of 1.1%-2.5%, but the exact path forward remains uncertain.

Governor Kazuo Ueda faces a communication challenge, balancing hawkish signals that could spur yen selling against dovish language that might destabilise bond markets. Some board members, such as Toichiro Asada, may again vote against the hike, while hawks like Naoki Tamura see the neutral rate near 2%. The decision also occurs against a backdrop of expansionary fiscal policy by Prime Minister Sanae Takaichi and warnings from IMF Managing Director Kristalina Georgieva about fiscal dominance and inflation expectations.