Forex Analysis & Reviews: 27.05.2025 - Bank of Japan Plans To Raise...

27.05.2025 11:32 AM

Bank of Japan Plans To Raise Rates Further

Despite the Bank of Japan's plans to continue raising interest rates, the yen is currently heading in a very different direction.

During his speech today, Bank of Japan Governor Kazuo Ueda supported the yen by clearly stating his intention to continue raising the key interest rate if the economy improves as expected. "We will adjust the degree of monetary easing as needed to ensure the Bank achieves its price stability target, provided incoming data gives policymakers greater confidence that their economic outlook will materialize," Ueda said during an international conference hosted by the Bank of Japan on Tuesday in Tokyo.

While Trump's start-stop tariff policy continues to destabilize global financial markets, Ueda's comments show that the Bank of Japan still sees another rate hike as the most likely next step. This supports renewed market expectations that the BOJ is on track for another policy adjustment this year.

Such a divergence in monetary policy between the U.S. Federal Reserve—under tariff-related pressure—and the Bank of Japan, which is seeking to normalize its ultra-loose monetary policy, creates a complex landscape for investors and traders. The interest rate differential continues to weigh on the yen, which, despite the BOJ's rhetoric, remains vulnerable to further weakening.

Nevertheless, despite uncertainty surrounding U.S. foreign policy and its potential impact on global trade, the Bank of Japan appears confident in the resilience of the domestic economy and its ability to withstand moderate rate hikes. A key factor here is inflation, which, although not yet at the target level, is showing signs of sustained growth supported by rising wages and domestic demand.

However, risks remain significant. Global economic instability and geopolitical tensions could undermine business and consumer confidence, which would negatively impact economic activity in Japan.

"In light of growing uncertainty, especially related to trade policy, we have recently revised our economic and inflation forecasts downward," Ueda said. "However, we still expect core inflation to gradually approach 2% in the second half of our forecast horizon," he added, noting that Japan is now closer to its inflation target than at any time in the past three years.

Ueda's statements show that the Bank of Japan is seeking not to appear out of touch by focusing solely on an academic perspective, especially in a context shaped by major developments such as Trump's tariff policies.

Data published last Friday showed that core consumer inflation (excluding fresh food) accelerated to 3.5% in April, staying at or above the BOJ's target for three full years. Upcoming data this week is expected to indicate that this trend persisted into May.

At the end of his speech, Ueda noted that Japan is experiencing a second supply shock due to surging food inflation, which distinguishes it from Europe and the U.S., and warrants close attention. "We are now facing another round of supply shocks in the form of rising food prices. Our baseline view is that the impact of food price inflation is expected to weaken. However, given that core inflation is now closer to 2 percent than it was a few years ago, we need to be cautious about how food inflation may affect core inflation."

It's worth recalling that at its policy meeting earlier this month, the Bank of Japan halved its growth forecast for the current fiscal year and delayed the expected timing for reaching its inflation target by one year. These moves were perceived as dovish and prompted many BOJ watchers to push back their expectations for the next rate hike. The Bank of Japan is expected to leave interest rates unchanged at its next meeting on June 17.

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