Japan's Central Bank Set to Push Rates to Highest Level in 30 Years

A Historic Shift in Japanese Monetary Policy

The Bank of Japan is expected to raise rates to 1.25% at the end of its two-day meeting on Friday amid inflationary pressures, according to a CNBC survey. If confirmed, the move would mark a significant milestone in Japan's long and cautious journey away from the ultra-loose monetary policies that defined its economy for decades. A hike would signal an acceleration of the tightening cycle, faster than the six-month interval the Bank has been following since it started policy normalization in March 2024.

Around 89% of respondents said they expect the BOJ to hike by 25 basis points, citing higher inflation, higher wages, and pressure from the U.S. government. That near-unanimous consensus among analysts reflects just how much the landscape has shifted for Japan — a country once synonymous with zero interest rates and deflationary stagnation.

Inflation and Wages Are Driving the Decision

Japan's headline inflation rate for July hit its highest this year, at 1.9%, due to increased energy costs from the Iran war. While that figure still sits below the BOJ's 2% target, the trajectory is unmistakable. In the same month, real wages rose 2.4%, rising for the seventh month in a row. That sustained wage growth is critical — it signals that inflation is becoming embedded in the broader economy, not just a blip driven by external shocks.

The BOJ last raised rates in June. That previous hike brought rates to 1%, at a time when Japan had been struggling with a weak yen and inflation that has started to creep up, partly due to the Iran war. Now, just three months later, the Bank appears ready to move again — a pace that would have seemed unthinkable just a few years ago.

Washington Is Pushing Tokyo to Act

The pressure to raise rates isn't coming from Tokyo alone. Most recently, Treasury Secretary Scott Bessent told BOJ Governor Kazuo Ueda to take "decisive market and monetary steps" at the G20 finance ministers and central bank governors meeting earlier this month. The message was pointed and public. The U.S. favors a stronger yen, as a weak one could cause Japan to sell U.S. assets, including Treasurys, to shore up its currency — a move that could push Treasury yields even higher.

Takahide Kiuchi, executive economist at Nomura Research Institute and former BOJ policy board member, said "The Trump administration has effectively checked any potential move by a Takaichi administration to block the Bank of Japan from raising interest rates," adding that "the Bank of Japan has gained a free hand to proceed with rate hikes." That dynamic — a U.S. administration effectively greenlighting a foreign central bank's tightening — is unusual, and it underscores how intertwined global monetary policy has become.

What Comes Next for the Yen and Japan's Economy

Around 61% of respondents said they expect the yen to trade between 155 and 160 in the next month. Homin Lee, senior macro strategist at Lombard Odier, said the BOJ's hawkish shift will help keep the yen stronger than 160, but appreciating it past 150 "will not be easy" because government and business officials will push back against "inappropriately" fast currency appreciation.

Asked which BOJ board members are most likely to dissent on a hike, around a third of respondents named Toichiro Asada and Ayano Sato — both seen as reflationists appointed by Prime Minister Sanae Takaichi earlier this year. Their presence on the board is a reminder that not everyone in Japan's power structure is comfortable with the speed of this shift. Still, with wages rising, inflation climbing, and Washington applying pressure, the BOJ appears to have both the mandate and the momentum to keep tightening — reshaping Japan's financial identity for the first time in a generation.