BOJ expected to pause rate hike cycle in March

The Bank of Japan (BoJ) is expected to keep its short-term interest rate unchanged at 0.50% at its two-day monetary policy review on Wednesday.

Any signal from the Bank of Japan on the timing and scope of future rate hikes could trigger wild moves around the Japanese yen (JPY).

The Bank of Japan is widely expected to pause its rate hike cycle this month after raising its policy rate to 0.50% from 0.25% in January, its highest level in 17 years, believing that Japan is on track to achieve its 2% inflation target.

Ahead of the Bank of Japan's January policy meeting, U.S. President Donald Trump returned to the White House and continued to push forward with tariff proposals on China, Canada and Mexico. Trump's protectionism has sparked a tariff war around the world, putting the world's major central banks in a difficult position.

While rising global inflationary pressures due to Trump’s tariffs could be a boon to hawks at the Bank of Japan, policymakers remain cautious about Japan’s economic outlook as final gross domestic product (GDP) in the fourth quarter of 2024 grew 0.6% from the previous quarter, slower than the initially reported 0.7%.

Despite growing concerns about an escalating trade war and an economic slowdown, Bank of Japan Governor Kazuo Ueda and his colleagues have continued to signal further rate hikes if inflation keeps moving toward their 2% target.

“Long-term interest rates are affected by many factors. But the biggest determinant is the market’s forecast of the outlook for our short-term policy rate,” Ueda told parliament on March 12, underscoring the BOJ’s determination to continue raising short-term rates.

This narrative appears to be supported by Japan's inflation rate remaining at its highest level since January 2023. The national Consumer Price Index (CPI) annual rate jumped to 4% in January from 3.6% in December. The "core" inflation rate, which excludes fresh food and energy prices, rose slightly to 2.5% in the same period, up from 2.4% in the previous month.

In addition, the country's 10-year government bond yield recently surged to its highest level since October 2008, signaling higher inflationary pressures. Meanwhile, the Japanese yen (JPY) hit a five-month high against the U.S. dollar (USD).

More importantly, Japan's average monthly household spending rose 0.8% year-on-year in real inflation-adjusted terms in January, marking the second consecutive month of growth.

The rising cost of living has heightened focus on the preliminary results of the Spring Wage Negotiations (Shunto) to be announced on Friday. The first round of data from Japan's largest labor union group, United, showed average wages rising 5.46% in fiscal 2025, compared with a requested increase of 6.09%. However, the result was higher than last year's 5.28% gain.

These factors continue to raise market expectations for the Bank of Japan to raise interest rates in the coming months. The latest Bloomberg survey of economists shows that "July remains the popular choice for the next rate hike, with 48% expecting action then, down from 56% in the previous survey."

"The Bank of Japan's two-day meeting will end on Wednesday and is widely expected to remain unchanged. The bank just raised rates by 25 basis points at its last meeting in January," said analysts at BBH.

The analysts added: "BoJ Governor Ueda has warned that the policy path will be guided by examining the impact of rate hikes already implemented, which argues against consecutive rate hikes. Swap markets expect the next 25 basis point rate hike to be in September."