Bank of Japan set to raise interest rates to 31-year high

Tokyo, September 18 - The Bank of Japan is poised to raise interest rates to a 31-year high on Friday, signaling a pledge to address inflation risks that may escalate if the commencement of a U.S. rate-hike cycle undermines the yen's strength versus the dollar. This move, the first in three months, would bring rates closer to levels deemed neutral by the BOJ, marking a departure from prolonged ultra-low rates that helped maintain the yen's status as a low-cost global funding currency.

However, the Federal Reserve's recent rate increase and potential further hikes later this year have compelled the BOJ to keep pace, as widening U.S.-Japan rate differentials could weaken the yen and escalate inflation through heightened import costs, according to analysts. The BOJ Governor Kazuo Ueda's post-meeting briefing, closely monitored by markets, is expected to provide insights into the timing and pace of additional rate hikes.

Strategist Takeshi Ishida of Kansai Mirai Bank noted the immense pressure on the BOJ following the Fed's rate hike and the ongoing expectations of more increases. At their two-day meeting concluding on Friday, the BOJ is scheduled to raise its policy rate from 1% to 1.25%, the highest level since 1995, and bring it within its estimated neutral range of 1.1% to 2.5%.