It is likely that the Bank of Japan will lift its growth outlook on 23rd January and indicate that it is willing to further increase the interest rates, as recent declines in the yen and future prospects of healthy wage growth continue to keep policymakers on their guard against the inflationary pressure.

However, BOJ Governor Kazuo Ueda may not give many indications as to when the central bank will respond by raising rates again, a move that is complicated by the soaring bond yields and the announcement by Prime Minister Sanae Takaki on Monday to dissolve a snap election in February.

After increasing interest rates to their highest level in 30 years, 0.75 per cent in December, the central bank will leave the cost of borrowing money unchanged in its two-day policy meeting that will close on Friday.

Markets will be seeking policy signals in the aftermath of the meeting press conference by Ueda, with a special concern on how the BOJ chief might be able to balance the desirability of preventing unwanted falls of the yen whilst simultaneously trying to prevent additional increases in bond yields.

Takiichi, on Monday, was echoing moves by the other parties to reduce the consumption tax in Japan and promised to put an end to “excessively tight fiscal policy,” which increased the possibility of further expenditure and reduction in taxes once the elections were over.

TAKAICHI and the Rates Confusion

Although expansionary fiscal measures can increase inflation and provide the BOJ with another excuse to tighten, a Takaichi triumph can embolden her reflationist supporters who believe in low rates to support a weak economy, some analysts say.

“Until now, the BOJ has been adopting a negative philosophy regarding the successive rate increases on the issue of the effect on the financial system in Japan and pressure from the Takiichi administration,” said Ayako Fujita, Japan’s chief economist at JPMorgan Securities.

“One of the key issues to observe is whether the recent depreciation of the yen would lead to a shift of this stance, ” she said.

Fear of the deteriorating finances of Japan has seen bond yields soaring upwards since the beginning of November, with the 10-year Japanese government bond yield reaching a 27-year high of 2.30 per cent on Tuesday.

Furthermore, fiscal and monetary dove Takaichi assumed the prime minister in October, and the yen has decreased approximately 8 per cent versus the dollar in order to hit an 18-month low last week of 159.45, which is the lowest it has been since Japan last intervened in July 2024.

The yen recovered slightly and was at 158.18 on Tuesday. However, the decline of the currency, which raises the cost of imports and more general consumer prices, has raised market opinions that the BOJ may accelerate the rate increases to prevent the threat of excessively high inflation.

A Rate Increase in April Cannot be Eliminated

According to Reuters, some policymakers at BOJ feel they may be able to increase rates even earlier than markets anticipate, with April being a real possibility, since a weak Yen would be an additional contribution to the already widening inflationary pressure.

The decade-long, gigantic stimulus by the central bank was phased off in 2024 and was followed by a series of increases in its short-term policy rate up to and including 0.75 per cent in 0.5 per cent in its latest move in the previous month.

Polled analysts at Reuters believe that the BOJ will not raise rates again until July, and over 75 per cent of them predicted that it would reach 1 per cent or above by September.