BOJ holds at 1% as yen weakness keeps September hike in play

The Bank of Japan is set to hold its policy rate at 1% at the end of its two-day meeting Friday, pausing after June's increase to a 31-year high as persistent yen weakness keeps the door open for another hike as soon as September.

"If the yen plunges and currency interventions fail to arrest the slide, the BOJ could be forced to raise rates as early as September," Barclays economists said.

The yen continues to hover around 163.70 to the dollar, threatening to push import costs higher on top of already-elevated energy prices. Markets are pricing in at least one more rate increase by the end of the year, with the BOJ's quarterly outlook report due Friday providing updated growth and price forecasts that will shape the policy path.

The decision matters because Japan's tightening cycle is at a critical juncture: a premature pause could allow inflation to persist above the 2% target, while an aggressive September move risks derailing an economy that Prime Minister Sanae Takaichi said Monday is "not yet free from the risk of returning to deflation."

Investors will scrutinize Gov. Kazuo Ueda's post-meeting remarks for clues on the timing of the next rate increase, particularly how strongly he emphasizes the risk of inflation overshooting. At its June meeting, the BOJ raised rates to 1% — the highest since 1995 — citing the possibility that underlying inflation could exceed its 2% target because of higher oil prices.

Yen Pressures Shape the Policy Calculus

The currency remains one of the main factors affecting Japan's price trends. Despite rising prices, Takaichi maintained a cautious stance Monday. "At this point, we don't believe the Japanese economy is in a position where it is free from the risk of returning to deflation — in other words, we cannot yet say Japan has fully beaten deflation," she said. "In particular, we need to closely monitor how the situation in the Middle East could impact the real economy."

Whether markets price in more aggressive increases will likely depend on Takaichi, a proponent of loose monetary policy, said Tomonobu Yamashita, an economist at Bank of America. The government's influence will be watched closely in the BOJ's summary of opinions from this week's meeting, particularly in remarks by the Cabinet Office representative, he said.

Although uncertainty surrounding the Middle East situation has caused crude prices to rise again, BOJ policymakers believe the risk of a significant downturn in the Japanese economy is low. They expect the government to secure sufficient energy supplies through routes that bypass the Strait of Hormuz.

The last time the BOJ raised rates in consecutive meetings was in 2000, when it lifted the overnight call rate from zero to 0.25 percent in August and followed with another 25-basis-point increase in October. A September move this year would mark the fastest tightening pace in more than two decades, showing the BOJ's shift from decades of ultra-loose policy.

This article is for informational purposes only and does not constitute investment advice.