BoJ Hike a Formality as Markets Focus on Pace of Tightening

The Bank of Japan is set to hike interest rates today, but markets are more interested in how quickly they will rise from here. A quarter point increase to 1.25% is seen as a formality by most economists and investors, with the central bank's guidance on the pace of tightening being the main event.

According to Reuters-polled economists, the policy rate is expected to reach 1.5% by the end of March next year and 1.75% by mid-2027. Goldman Sachs argues that a faster hiking path would put upward pressure on Japanese government bond yields and could support the yen further.

However, a firmer yen tends to weigh on exporter earnings, which could be a concern for the Nikkei index. The bank's guidance is also being closely watched, with Governor Ueda expected to avoid committing to a specific timetable but possibly repeating earlier comments suggesting the bank could move faster if financial conditions are judged too loose.

The yen has already strengthened recently, falling from around 160 to near 153 over the past several weeks as rate hike expectations built. This leaves room for a 'buy the rumour, sell the fact' reaction if Ueda sticks to a cautious tone.