While a hike still keeps its policy rate low by global standards, it would be another landmark step in Governor Kazuo Ueda’s efforts to normalise monetary policy in a country long accustomed to unconventional easing and near-zero rates.
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With stubbornly high food costs keeping inflation above its 2% target for nearly four years, the BOJ is widely expected to raise short-term interest rates to 0.75% from 0.5% at a two-day policy meeting ending on Friday.
Any such move would underscore the BOJ’s growing conviction that Japan was making progress in sustaining a cycle of rising inflation accompanied by solid wage gains – a prerequisite it set for pushing up borrowing costs.
But Ueda also faces pressure to drop hawkish signs to avoid triggering a fresh bout of yen declines that push up import costs and broader inflation, analysts say.
While a weak yen boosts exporters’ profits, it could prod retailers to pass on costs and raise prices – adding strains to households already suffering from sliding real wages.
The number of food and beverage items that saw prices rise exceeded 20,000 this year, up 64.6% from 2024, though it is likely to fall to just over 1,000 in 2026, according to a survey by private think-tank Teikoku Databank released last month.
But the number of price hikes could spike if yen declines speed up, heightening inflationary risks and complicating the BOJ’s rate-hike decisions next year, analysts say.
Japan stands ready to intervene in the currency market to prevent abrupt, sharp yen falls out of sync with fundamentals, government officials say, a sign the administration and BOJ share their aversion to excessive yen declines.
Kei Fujimoto, senior economist at SuMi TRUST, does not expect the yen to appreciate much with a December rate hike already priced in by markets, and recent yen weakness driven largely by concerns over Japan’s fiscal deterioration.
“Both a weak yen and higher interest rates may push up consumer prices, corporate production costs and funding costs, potentially weighing on business sentiment,” he said.
Reporting by Leika Kihara; Editing by Sam Holmes
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