BOJ Set for Hawkish Tone Amid Inflationary Pressures

The Bank of Japan (BOJ) is set to maintain interest rates at 1 per cent at its two-day meeting ending on July 29, but leave scope for further hikes with hawkish communication.

This decision comes as the economy faces mounting inflationary pressure from the Middle East war, a weak yen, and robust global AI demand. Analysts say Governor Kazuo Ueda faces the competing demands of talking down the yen bears through hawkish communication while not antagonising a government seen as critical of further policy tightening.

The BOJ's quarterly outlook report is expected to revise up its growth forecast for fiscal 2026, but cut its inflation forecast due to subsidies and a drop in oil costs. However, jittery oil markets and rising import costs from a weak yen may keep any downgrade small.