BOJ Signals Resolve to Continue Tightening as Yen Faces Pressure

The Bank of Japan (BOJ) is expected to keep interest rates steady at 1% on Friday, but signal its resolve to continue pushing up borrowing costs. This decision comes after the government intervened in the currency market on Thursday, buying yen and selling dollars, which helped pull the sagging currency from four-decade lows.

The BOJ meeting follows the Federal Reserve's decision on Wednesday to keep interest rates steady, but with three dissenting voices calling for a quarter-percentage-point hike. Markets are focusing on the BOJ's quarterly outlook report and Governor Kazuo Ueda's post-meeting news briefing for clues on how soon it could raise still-low borrowing costs.

Analysts expect the BOJ to revise up its growth forecast for fiscal 2026 due to receding fears of a severe hit from the Middle East conflict. However, they also anticipate a cut in inflation forecast due to subsidies and lower oil costs. Despite this, Kei Fujimoto, senior economist at SuMi Trust, believes that stronger growth would reinforce confidence that the economy can withstand further policy normalization.

The BOJ raised rates to a 31-year high in June and signaled its readiness to tighten further as it focuses on taming price pressures from the energy shock. Most analysts polled by Reuters expect the BOJ to raise rates again to 1.25% by year-end, but Ueda will face the challenge of talking down yen bears through hawkish communication.