BOJ Set for Biggest Rate Hike Since 1991 as Inflation Pressures Mount

The Bank of Japan is set to raise interest rates on Friday to a 31-year high, joining other major central banks in fighting inflation pressures. The move would be the first hike in three months and take interest rates closer to levels deemed neutral to the economy.

This decision follows a similar move by the European Central Bank and an expected tightening by the U.S. Federal Reserve later this week. Markets are divided on how the BOJ's communication will affect bond yields, with some seeing it as helping lower yields by alleviating concern that the BOJ is behind the curve on inflation.

BOJ Governor Kazuo Ueda faces a huge communication challenge in signaling readiness to keep pushing up borrowing costs while avoiding pre-committing to another early rate hike. A hike to 1.25 per cent would bring the BOJ's policy rate within its estimated range of Japan's nominal neutral rate, raising questions around how far it could eventually hike rates.

Analysts polled by Reuters expect the BOJ to hike rates to 1.25 per cent this month and then to 1.75 per cent in the second quarter of 2027, with most seeing the terminal rate as being at least 1.75 per cent.