itstargetnews
By Leica Kihara
TOKYO (Reuters) – The Bank of Japan is expected to raise interest rates on Friday, barring any market shock when U.S. President-elect Donald Trump takes office, a move that would raise borrowing costs to short term at levels not seen since the global financial crisis of 2008. .
A policy tightening would underline the central bank’s determination to steadily raise interest rates, now at 0.25%, to nearly 1%, a level analysts see as cooling rather than overheating of the Japanese economy.
At the two-day meeting ending Friday, the BOJ is likely to raise its short-term policy rate to 0.5% unless Trump’s inaugural address and executive orders roil financial markets, sources said to Reuters.
In a quarterly outlook report, the board is also expected to raise its price forecasts on growing prospects that expanding wage gains will keep Japan on track to sustainably reach its 2% inflation target from the bank
A hike by the BOJ would be the first since July last year when the move, along with weak U.S. jobs data, surprised traders and sent global markets tumbling in early August.
Eager to avoid a repeat, the BOJ has carefully prepared markets with clear signals from Governor Kazuo Ueda and his deputy last week that a rate hike was expected. The remarks sent the yen rallying as markets pegged a roughly 80% chance of a rate hike on Friday.
There were also signs of near-term action last month. Although the BOJ held off on raising rates at its Dec. 18-19 meeting, hawkish board member Naoki Tamura proposed raising rates. Some of his colleagues also saw the conditions being set for an imminent rate hike, meeting minutes showed.
With policy tightening this week seen as a certainty, market attention is shifting to Ueda’s post-meeting briefing for clues on the timing and pace of further hikes.
With inflation above the BOJ’s 2% target for nearly three years and the weak yen keeping import costs high, Ueda is likely to underline policymakers’ determination to keep raising interest rates.
But there are good reasons to tread carefully. Although the International Monetary Fund raised its forecast for global growth to 2025, Trump’s policies risk destabilizing markets and fueling uncertainty about the outlook for Japan’s export-dependent economy.
Domestic political uncertainty could also increase as Prime Minister Shigeru Ishiba’s minority coalition may struggle to pass the budget in parliament and win upper house elections scheduled for July.
The economic damage from previous ill-fated rate hikes also haunts BOJ policymakers. The BOJ ended quantitative easing in 2006 and pushed short-term rates to 0.5% in 2007, moves that sparked a firestorm of political criticism for delaying the end of deflation.
