BOJ Set to Hike Rates Amid Sticky Inflation and Weakened Yen

The Bank of Japan is widely expected to raise interest rates by 25 basis points at its September meeting, bringing rates to their highest levels since 1993. This would be the BOJ's sixth rate hike since it ended ultra-loose policy in 2024 and its second this year.

Analysts point to sticky inflation and prolonged yen weakness as driving forces behind the expected rate increase. The recent surge in oil and gas prices, stemming from the Iran conflict, has contributed to higher producer price index inflation, which jumped to a 3-½ year high in August.

Despite government subsidies on fuel, underlying inflation is back in sight of the BOJ's 2% annual target, keeping the central bank on guard for potential overshooting. Recent data showed continued resilience in Japanese wage income, indicating that producers will be able to pass on higher costs.