BOJ set to raise interest rates to 31-year high as inflation risks loom

The Bank of Japan is set to raise its benchmark interest rate by 25 basis points to 1.25% from 1.00% at its upcoming policy meeting, lifting borrowing costs to a 31-year high. The decision reflects growing concerns over persistent inflationary pressures driven by high energy prices, weak currency import costs, and strong demand. This move follows previous rate increases and marks another significant departure from decades of ultra-loose monetary policy. A rate increase to 1.25% places the policy rate squarely within the BOJ's estimated nominal neutral rate range of 1.1% to 2.5%. Market analysts surveyed by Reuters anticipate further tightening, projecting rates to reach 1.50% by March and 1.75% by the second quarter of 2027, with several central bank policymakers viewing the neutral rate around 2.00%. BOJ Governor Kazuo Ueda faces a delicate communication balance. Central bank officials aim to curb inflation and support the yen without sounding overly hawkish, which could exacerbate recent bond market sell-offs that have driven Japanese government bond yields to multi-decade peaks amid fiscal expansion concerns.