BoJ Faces Hawkish Dilemma Amid Weakening Yen

The Bank of Japan's upcoming rate decision on Friday is expected to be overshadowed by its potential hawkish messaging on future policy due to inflationary pressures and a weakening yen. Japan is experiencing high inflation, with annual inflation standing at 1.7% in June, while the US dollar-Japanese yen exchange rate has reached a 40-year high of 168.93.

Marcel Thieliant, head of Asia-Pacific at Capital Economics, believes that the BoJ will face downside risks to economic activity and is preparing for a rate hike in October due to the Japanese yen's depreciation. He predicts that rates will reach above-consensus 2% by end-2027.

Ahmad Assiri, market strategist at Australia-based Pepperstone, thinks that the BoJ will maintain its policy rate from the 1% level this week and focus on updated forecasts and remarks by BoJ Governor Kazuo Ueda to shed some light on the bank's future policy roadmap. He notes that growing confidence in another rate hike could support Japanese government bond yields.