BOJ set to raise interest rates to 31-year high as inflation risks loom

The Bank of Japan is preparing to raise interest rates to a 31-year high on Friday, signaling a readiness to continue increasing borrowing costs, according to Reuters. This move is being made in response to persistent inflation pressures caused by soaring oil prices. This is the first hike in three months and brings interest rates closer to the neutral level the BOJ deems appropriate for the economy, marking another step away from decades of low rates that have kept the yen as a cheap global funding currency.

The BOJ's move follows a rate hike by the European Central Bank and an expected increase by the U.S. Federal Reserve later in the week, highlighting the focus on inflation risks. With the markets largely anticipating a rate hike, the focus is now on any hints BOJ Governor Kazuo Ueda may provide regarding the timing and pace of further increases.

The BOJ is expected to stay as vague as possible to avoid triggering a sell-off in bond markets, which could push yields higher. The central bank has several more hikes in its sights, with analysts expecting rates to reach 1.25% by the end of this month, 1.5% by end-March next year, and 1.75% by the second quarter of 2027. The BOJ's actions are complicated by Prime Minister Sanae Takaichi's expansionary fiscal policy, which could further fuel inflation risks.