TOKYO, Jan 20, 2026, 20:05 JST
- BOJ is set to keep its policy rate steady at 0.75% on Jan. 23 but signals it may raise rates again down the line
- The outlook is complicated by yen weakness and a snap election called for February, even as bond yields rise
- Citi’s Akira Hoshino predicts three quarter-point rate hikes in 2026, provided the currency remains weak
The Bank of Japan looks set to hold interest rates steady this week but will likely hint at further tightening ahead. The yen’s continued slide, coupled with election-related political uncertainty, is heightening concerns among policymakers about inflation.
Friday’s decision comes after the BOJ raised its policy rate to 0.75% in December, hitting a 30-year peak. Investors are focused on clues about timing, rather than expecting a shift in policy direction.
This matters now as Japan’s weak currency pushes up import costs, while climbing government bond yields tighten financial conditions independently. The BOJ faces the challenge of balancing both, with fewer options for a straightforward, textbook approach.
The two-day meeting wraps up Friday, with the rate decision expected early afternoon in Tokyo. Governor Kazuo Ueda will brief reporters later that day, and his news conference could shake markets even more than the statement itself.
Prime Minister Sanae Takaichi announced on Monday plans to call a snap election in February and repeated calls to cut Japan’s consumption tax, the sales levy. The Financial Times reported investors are now watching closely to see how the BOJ will respond to the political shake-up.
Analysts warn that a looser fiscal policy might fuel inflation further, pushing the BOJ toward raising rates. That’s despite a Takaichi victory potentially strengthening calls from advisers who want to keep borrowing costs low. Ayako Fujita, Japan chief economist at JPMorgan Securities, noted, “Whether the recent yen depreciation will prompt a change in this stance is a key point to watch.”
Bond markets have sounded an early alarm. On Tuesday, the 10-year Japanese government bond yield surged to 2.30%, marking a 27-year peak, Reuters reported, as concerns mounted over Japan’s fiscal outlook.
Since Takaichi took office in October, the yen has dropped roughly 8% against the dollar. It briefly hit 159.45 last week, marking an 18-month low, before pulling back to about 158.18 on Tuesday. A weaker yen tends to boost consumer prices by making imports more expensive.
Citigroup strategist Akira Hoshino flagged a potential shift at the BOJ if the dollar climbs past 160 yen. He envisions a quarter-point rate hike to 1% in April, followed by another in July, and possibly a third before year-end—assuming the yen remains weak. “Put simply, the yen’s weakness is being driven by negative real interest rates,” Hoshino said, highlighting borrowing costs once inflation is factored in. Bloomberg
Sources inside the BOJ told Reuters policymakers are expected to raise their growth forecast for fiscal 2026 and possibly nudge up the core inflation projection. Core inflation excludes fresh food and serves as a key measure of underlying price trends.
A faster pace of rate hikes isn’t guaranteed. If bond yields climb sharply, officials might tread more carefully. A pause in the yen’s slide would ease urgency to act, and election politics could complicate the policy debate.
Japan wrapped up its decade-long ultra-loose stimulus in 2024 and has pushed rates up multiple times since. A Reuters poll shows most analysts still eye a July hike, with over 75% forecasting rates to hit 1% or above by September.
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