BOJ Rate Hike Imminent as Japan's Weak Yen Policy Backfires

The Bank of Japan (BOJ) is facing a critical decision on whether to raise interest rates, a move that has been long debated and now seems imminent. Governor Kazuo Ueda is getting support from Prime Minister Sanae Takaichi, who previously called it 'stupid' for the BOJ to consider a hike.

The weak yen policy championed by Takaichi's Liberal Democratic Party (LDP) has backfired, leading to inflation above the BOJ's 2.0% target and record-low approval ratings for Takaichi. The LDP is now blessing a near-term rate hike, but it remains uncertain whether they will tolerate further hikes in October and December.

The BOJ effectively froze Japan's rate environment in place in 1999, when policymakers slashed rates to zero and pioneered quantitative easing. Since then, the benchmark rate has remained at just 1.0%. With a yen near 40-year lows and geopolitical conflict in the Middle East driving up oil prices, stabilizing the currency requires the BOJ to keep tightening.