Bank of Japan Set to Hold as It Assesses Impact of June Increase — Preview

By Megumi Fujikawa

TOKYO--The Bank of Japan is likely to take a breather this week to assess the effects of its latest move after raising its policy rate to the highest level in three decades.

For clues on the timing and pace of future action, markets will closely examine the bank's latest economic and inflation forecasts.

The Call: The Japanese central bank is widely expected to keep its policy rate at 1% at the end of its two-day meeting Friday. At its previous meeting in June, the bank raised rates to a 31-year high, citing the possibility that underlying inflation could exceed its 2% target due to higher oil prices.

The central bank's commitment to further tightening remains intact amid persistent inflation concerns. Markets are pricing in at least one more rate increase by the end of the year.

The Outlook: The BOJ's policy board is scheduled to release its quarterly outlook report, featuring updated growth and price forecasts, alongside its policy decision.

Although uncertainty surrounding the Middle East situation has caused crude prices to rise again, BOJ policymakers believe the risk of a significant downturn in the Japanese economy is low. They expect the government to secure sufficient energy supplies through routes that bypass the Strait of Hormuz.

Yen Pressures: Weakness in the Japanese currency remains one of the main factors affecting Japan's price trends, threatening to push up import costs further on top of already-high energy prices. The currency continues to hover around 163.70 to the dollar.

In a risk scenario in which the yen plunges and Japanese authorities' currency interventions fail to arrest the slide, the BOJ could be forced to raise rates as early as September, Barclays economists said.

The Focus: Investors will scrutinize Gov. Kazuo Ueda's post-meeting remarks for clues on the timing of the next rate increase, particularly how strongly he emphasizes the risk of inflation overshooting.

Whether markets price in more aggressive increases will likely depend on Prime Minister Sanae Takaichi, a proponent of loose monetary policy, said Bank of America's Tomonobu Yamashita. The government's influence will be watched closely in the BOJ's summary of opinions from this week's meeting, particularly in remarks by the Cabinet Office representative, he said.

Despite rising prices, Takaichi on Monday maintained a cautious stance. "At this point, we do not believe the Japanese economy is in a position where it is free from the risk of returning to deflation--in other words, we cannot yet say Japan has fully beaten deflation," she said. "In particular, we need to closely monitor how the situation in the Middle East could impact the real economy."

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com

(END) Dow Jones Newswires

July 28, 2026 02:57 ET (06:57 GMT)