BOJ Poised to Hike Rates Amid Yen Weakness and Rising Inflation

The Bank of Japan (BOJ) is leaning towards a quarter-point rate hike at its meeting on September 17-18, according to sources close to the central bank. This would take the policy rate from 1.0% to 1.25%, marking the fastest tightening since the BOJ exited a decade-long stimulus period.

The decision is influenced by the yen's weakness and rising inflation expectations. The yen currently trades at around 159.20 per dollar, nearing the psychologically critical 160 line. Former BOJ board member Seiji Adachi believes that if the bank does not hike rates, the yen could weaken sharply again.

Core inflation accelerated to 1.8% in July, and household and corporate inflation expectations are approaching or exceeding the 2% target. Adachi forecasts that inflation could exceed 2.5%, prompting the BOJ to move again as early as January, pushing beyond the previously considered ceiling of 1.25-1.5%.

The decision will have global implications, with a sustained tightening cycle tightening global financial conditions and affecting emerging markets. Kenyan and Nigerian eurobonds are particularly sensitive to changes in Japanese yields, which can narrow the cheap funding that supports these assets.