Bank of Japan likely to keep policy rate steady, lift growth forecasts
The Bank of Japan is likely to keep its benchmark interest rate steady at a two-day policy meeting from Thursday, opting to examine the impact on the economy of the previous hike to a 30-year high and a falling trend in the yen that has alarmed Japanese authorities.
The Policy Board also faces surging Japanese government bond yields -- a factor that would usually be expected to help stem the yen's slide, especially against the U.S. dollar -- as financial markets expect more fiscal stimulus under the government of Prime Minister Sanae Takaichi.
The BOJ is expected to announce new economic and inflation forecasts at the end of the meeting. The outlook for economic growth is likely to be revised upward for the current and next fiscal year as concerns have eased about the hit from higher U.S. tariffs.
The meeting comes after the central bank lifted its benchmark rate to around 0.75 percent in December, the highest since 1995, judging that the likelihood of achieving its 2 percent inflation target was rising.
BOJ chief Kazuo Ueda has said the central bank is prepared to continue raising rates if economic activity and price developments move in line with expectations, citing still significantly low interest rates when inflation is taken into account.
Financial markets are expected to parse Ueda's remarks for any hints as to when the next interest rate hike may come. The yen's weakness has raised the prospect of faster inflation in resource-scarce Japan and continued wage growth would give the BOJ reason to tighten monetary policy.
For now, many BOJ watchers say the central bank is expected to take a wait-and-see stance to gauge the impact of its recent shift away from ultralow rates on corporate activity and households.
In its previous quarterly economic outlook released after its October meeting, the BOJ projected Japan's real gross domestic product would expand 0.7 percent in fiscal 2025 through March and in the following year.
Since then, the government has compiled a 21.3 trillion yen ($135 billion) package of economic measures aimed at easing the pain felt by households from rising prices.
While Japan's fiscal health is in dire straits, both ruling and opposition parties are in favor of suspending the consumption tax on food to woo voters heading into a parliamentary election on Feb. 8.
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