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(Bloomberg) -- The Bank of Japan is widely expected to raise its benchmark rate Friday by the most in 18 years, in a show of boosted confidence over the sustainability of inflation as it progresses down its normalization path.
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Governor Kazuo Ueda and his board will likely decide to increase the overnight call rate to 0.5% at the conclusion of their two-day meeting. The 25 basis point increase would be the largest since February 2007, adding to signs that the economy is finally getting back to normal.
The two points Ueda laid out last month as key when considering a rate hike have been largely cleared. The country’s wage hike momentum is looking robust so far, and no major market shocks have followed the initial days of US President Donald Trump’s second term. People familiar with the matter told Bloomberg earlier that BOJ officials see a high possibility of a rate hike on Friday, barring Trump creating too many negative surprises.
Overnight-indexed swaps suggest traders see an about 100% chance of a rate increase at this meeting, more than doubling from the end of last month. About three quarters of economists share this view, jumping from around half last month, according to the latest Bloomberg survey.
With the rate hike well expected by investors, a key focus of the gathering will be how Ueda will map out the path toward further hikes, as Japan’s borrowing costs remain around the lowest among developed nations. A quarterly economic forecast that’s set to be published at the same time will likely show that the pace of price growth will be consistent with the BOJ’s target in the latter half of a three-year forecast period through March 2027. That indicates more hikes are clearly in the central bank’s future.
While Ueda is unlikely to give any specific rate path so he can keep his options open, sounding too dovish would risk weakening the yen, adding to inflationary pressures. It may also put currency authorities on high alert over a potential need to directly intervene in the markets.
The policy statement and quarterly economic outlook report are usually released around noon, followed by Ueda’s press conference at 3:30 p.m.
What Bloomberg Economics Says...
“With markets already pricing in the hike, the focus is on Ueda’s guidance at the post-decision press conference. We think he will deliver seemingly cautious messaging without hinting at the timing of future hikes.”