Bank of Japan to signal more rate hikes as price pressures build

The Bank of Japan is poised to keep interest rates unchanged on Friday but is expected to communicate a hawkish stance, signaling potential future rate hikes as inflationary pressures mount. These pressures stem from the Middle East conflict, a weakening yen, and strong global demand for AI technology.

Governor Kazuo Ueda faces a delicate balancing act: using hawkish communication to curb yen depreciation without antagonizing the government, which is reportedly critical of further policy tightening. Analysts anticipate the BOJ will maintain its view that inflation risks are skewed to the upside, with some predicting the next rate increase could occur in December, potentially sooner if inflation concerns escalate or the yen's fall becomes unsustainable.

The central bank is likely to revise its growth forecast for fiscal 2026 upward, reflecting receding fears of a severe economic hit from the Middle East conflict. However, any downgrade to inflation forecasts might be minimal due to volatile oil markets and rising import costs associated with the weak yen. Despite easing immediate oil-driven inflation risks, the BOJ is expected to maintain its warning about inflation potentially overshooting its 2% target, as many companies plan price increases for everyday goods.

Hawkish members on the BOJ's board have advocated for faster rate hikes to bring the policy rate closer to a neutral level for the economy. Corporate inflation expectations have reached record highs according to the BOJ's "tankan" survey, and its regional report indicated concerns related to the U.S.-Israeli war on Iran.

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The BOJ is likely to maintain its view that risks to the price outlook is skewed to the upside.