By Leika Kihara

(Reuters) – The Bank of Japan concluded its first policy meeting of the year on Friday with the outcome to be announced days after the inauguration of US President Donald Trump.

Here’s a guide to what to expect and why the BOJ’s rate review is important:

WHEN WILL THE BOJ MEETING HAPPEN?

The BOJ board that sets monetary policy held a two-day meeting that ended on Friday. It will announce its decisions at the end of its deliberations.

The BOJ ended years of negative interest rates in March and raised its short-term policy target to 0.25% in July. It signals a willingness to hike again if wages and prices move as planned.

WILL THE BOJ RAISE INTEREST RATE?

There is growing conviction within the BOJ that the conditions for another hike are in place. The economy continues to expand moderately and inflation has remained above the 2% target for almost three years.

Companies continued to pass on rising raw material and labor costs to buyers, suggesting the BOJ board is likely to revise its inflation forecasts in a quarterly outlook report due after the end of meeting.

More importantly, there are growing signs that companies will offer substantial wage increases for the third year in a row in annual wage negotiations with unions that began in March.

The regional branch managers of the BOJ said that the increase in wages spread to companies of all sizes and sectors, meeting a significant requirement for raising interest. As such, the central bank is likely to raise rates by 0.5% on Friday.

WHAT ARE THE BOJ POLICYMAKERS SAYING TODAY?

The BOJ’s views on wages and the US policy outlook are closely watched by markets, after Governor Kazuo Ueda cited uncertainty over the domestic wage outlook and Trump’s policies as reasons for restraint. to raise rates last month.

In a speech on January 14, Deputy Governor Ryozo Himino said that wage growth is likely to remain strong this year. A day later, Ueda echoed optimism in a sign of the BOJ’s conviction that Japan is moving toward hitting its inflation target firmly.

Himino and Ueda said the BOJ will debate whether to raise rates this month, indicating a strong chance of a hike.

WHAT CAN POLICYMAKERS SAY?

With more prospects of continued wage gains, the remaining obstacle for raising rates is the risk of Trump dropping a bombshell and raising financial markets.

Deputy Governor Himino said he will look for signs of “balance and schedule” in the new president’s policy measures, as well as anything Trump hasn’t flagged so far.

A global share rally this week eased fears among policymakers that Trump’s tariff threats could cause market turmoil, further raising the chance of a rate hike on Friday.

HOW WILL JAPAN’S MARKETS REACT TO THE RATE INCREASE?

The withdrawal of bets on further rate cuts by the US Federal Reserve means that the US-Japan interest rate differential will remain wide, keeping the yen under downward pressure.

A rate hike by the BOJ could temporarily boost the yen. But the currency’s gains may not last long unless Ueda delivers hawkish comments on the outlook in his post-meeting news briefing.

WHAT ELSE SHOULD MARKETS BE WATCHING?

The BOJ will release a quarterly outlook report with revised growth and inflation forecasts, showing how optimistic the board is on Japan’s prospects for sustainably hitting 2% inflation. That will affect the pace of future rate hikes.

Ueda may also give some indication of the timing and pace of further hikes in his post-meeting briefing.

The key is the governor’s view of Japan’s neutral rate. BOJ staff estimates show the inflation-adjusted real neutral rate to be in the range of around -1% to +0.5%. That means if inflation hits the BOJ’s 2% target, it could raise short-term rates by at least around 1% without cooling growth.

Based on the October forecasts, the BOJ expects short-term rates to approach what is considered neutral “in the latter half of the three-year projection period” until March 2027, suggesting some time after October 2025.

While hawkish board member Naoki Tamura projected a neutral rate of around 1%, Ueda said it was very difficult to make reliable estimates due to a lack of data.

WHAT’S NEXT?

Many analysts expect the BOJ to continue raising rates at a pace of roughly twice a year. If the BOJ increases rates on Friday, it could remain in a holding pattern until the latter half of this year when there is more clarity on the impact of Trump’s policies.

The country’s politics also complicate the timing of the BOJ’s rate hike in an upper house election scheduled for July, where Prime Minister Shigeru Ishiba’s minority coalition may struggle to secure votes. The BOJ may want to avoid shifting policy until the political dust settles.