Bank of Japan poised to raise rates to 1.25pc amid inflation, weak yen

The Bank of Japan is set to raise interest rates to 1.25 percent on Friday in response to inflation and a weakening yen, according to market expectations. The decision comes amidst rising oil prices due to the Middle East crisis, which continues to fuel inflation. The last increase was in June, and officials have indicated their willingness to raise borrowing costs to 1.25 percent, the highest level in over three decades.

This move is necessary to combat advancing inflation, as highlighted by former currency chief and Asian Development Bank president Takehiko Nakao. Additionally, the Bank of Japan may provide support to the yen, which experienced its weakest level against the dollar in 40 years in July. This depreciation was primarily driven by the disparity in interest rates between Japan and the US Federal Reserve, prompting foreign investors to favor assets yielding better returns in dollars.

The Bank of Japan's decision to accelerate rate hikes is influenced by the economic and political implications of failing to meet market expectations, particularly in regards to the US Treasury secretary's demands for faster rate increases in exchange for intervention.