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

The Bank of Japan (BoJ) is poised to raise interest rates to a 31-year high on Friday, aiming to combat inflation risks that could surge if the US begins a rate-hike cycle and weakens the yen against the dollar, according to <source>. This move would mark the first hike in three months and bring rates closer to the BoJ's target for economic neutrality, a departure from decades of ultra-low rates that made the yen a cheap global funding currency <source>.

The Federal Reserve's recent rate hike and potential further increases later in the year have pressured the BoJ to keep pace, as a widening US-Japan rate gap could weaken the yen and lift inflation through higher import costs, analysts suggest <source>. If the Federal Reserve hikes rates again in December, the BoJ may have to follow suit <source>.

At their two-day meeting, the BoJ is expected to raise its policy rate to 1.25% from 1%, bringing it to levels unseen since 1995 and within the BoJ's estimated neutral rate range of 1.1% to 2.5% <source>. While core consumer inflation remained steady near the BoJ's 2% target in August, stronger-than-expected inflation could persist, with wholesale inflation rising due to weak yen and high energy costs <source>.

Despite the expected rate hike, the BoJ still lags behind global peers, including the European Central Bank and the US Federal Reserve, in terms of its policy rate <source>. The BoJ governor, Kazuo Ueda, has been cautious about the timing and pace of future rate hikes, emphasizing the need to monitor inflation conditions and financial conditions <source>.