Bank of Japan Plans Biggest Rate Hike in 35 Years

The market braces for a significant shift in Japan’s monetary policy this Friday. The Bank of Japan (BoJ) convenes with the dual goals of curbing the dollar’s surge—now under President Donald Trump’s administration—and implementing a new interest rate hike, anticipated to be the institution’s most aggressive move since 1990.

Japan's Household Spending Rises For The First Time in 13 Months

Analysts expect the BoJ to close January with its benchmark rate set at 0.5%. The 25-basis-point hike implied by Overnight Indexed Swaps (OIS) suggests that the BoJ will push the yen’s official rate to its highest level since 2008.

Hawkish Policy Adjustment

Even before Trump’s inauguration, several BoJ officials had been signaling the market to prepare for tighter monetary policy. This followed a notable rise in Japanese bond yields, reaching decade-long highs across most of the yield curve. For instance, the 10-year Japanese bond last week hit a secondary market yield of 1.2% (currently 1.18%), its highest since April 2011. Meanwhile, 40-year bonds are trading at unprecedented levels.

However, in recent sessions, shifts in the debt market and the dollar’s advance against the yen have driven expectations of a more aggressive tightening than initially forecast after the BoJ’s last 2024 meeting, where it chose to maintain its benchmark rates. On January 1, a 10-basis-point increase was anticipated for this Friday, but that projection has since risen to 25 basis points.

Historically, decisive interventions by the Bank of Japan have triggered cascading reactions in global financial markets. For example, the yen intervention last year to counter its decline against the dollar wiped 12% off the Japanese stock market in August.

USD/JPY

Japanese Yen Outlook

At the time, one U.S. dollar traded at 160 yen. Today, the exchange rate stands above 155 yen, with market bets leaning toward further yen depreciation amid the looming tariff war.

Higher Japanese borrowing costs are expected to provide support for the yen, helping to reverse its 5% decline over the past year. However, while the BoJ continues to raise interest rates—contrary to the European Central Bank and the U.S. Federal Reserve—the interest rate differential remains a challenge for Governor Kazuo Ueda.

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Ignacio Teson
Ignacio Teson
Economist and Financial Analyst
Ignacio Teson is an Economist and Financial Analyst. He has more than 7 years of experience in emerging markets. He worked as an analyst and market operator at brokerage firms in Argentina and Spain.
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