According to sources familiar with the matter who told Bloomberg, although the Bank of Japan (BOJ) may keep interest rates unchanged at its upcoming policy meeting, exchange rate factors could prompt a reassessment of the timing of rate hikes, and it might even be forced to act earlier. Bloomberg reports that BOJ officials believe that the yen's weakness is increasingly impacting prices, especially as companies are more inclined to pass rising input costs onto consumers, which could further intensify inflationary pressures. This article is based on Ye Huiwen's research report “Yen's Sharp Drop Forcing BOJ to Hike Rates Early? Report: Officials More Concerned About Exchange Rate Weakness and Inflation,” compiled and edited by BlockBeats.
(Previous context: BOJ raised interest rates by 25 basis points to 0.75%, a 30-year high)
(Additional background: BOJ minutes: Gradual rate hikes to 1% by 2025)

Table of Contents

• January Meeting Expectations: Keep Rates Unchanged
• Focus on Exchange Rate Transmission Mechanism
• Market Background and Political Factors

BOJ officials are increasingly concerned about the potential impact of yen weakness on inflation, which could materially interfere with the future rate hike path. Sources familiar with the matter told Bloomberg that although the BOJ may keep rates steady at its upcoming policy meeting, exchange rate factors could prompt a reassessment of the timing of rate hikes, and it might even be forced to act earlier.

Bloomberg reports that BOJ officials believe that the yen's weakness is increasingly affecting prices, especially as companies are more inclined to pass rising input costs onto consumers, which could further intensify inflationary pressures. Although the BOJ just raised its benchmark interest rate last month and has not set a fixed borrowing cost path, if the yen continues to weaken, policymakers may consider bringing forward the originally planned rate hikes.

Currently, most private economists expect the BOJ to raise rates roughly once every six months, meaning the next move could occur this summer. However, sources told Bloomberg that officials prefer to implement policy adjustments in a timely manner rather than being overly cautious, indicating that the previously expected pace of rate hikes faces uncertainty. Following this news, the USD/JPY exchange rate briefly fell to around 158.68 before rebounding to 158.33. As of press time, the USD/JPY is at 158.55.

January Meeting Expectations: Keep Rates Unchanged

The BOJ will announce its latest policy decision on January 23. Sources told media that officials currently believe maintaining the rate at 0.75% is appropriate, a level that has reached a 30-year high. While the overall tendency is to hold steady, the committee will continue monitoring economic data and financial market changes until the last minute to make the final decision.

The focus of this meeting will be on how the BOJ assesses the impact of the yen on potential inflation. Sources told Bloomberg that given inflation is approaching the BOJ's 2% target, officials will closely watch how exchange rate fluctuations influence household and corporate price expectations.

Focus on Exchange Rate Transmission Mechanism

Yen depreciation typically increases inflationary pressures by raising import costs, while also boosting export profits. However, some officials point out that as the yen continues to weaken, its negative impact on the economy may be increasing. They believe the BOJ still has room to raise rates further, with the key being timing policy adjustments appropriately.

Japanese business voices on exchange rate issues are also becoming more frequent. As the head of Japan Business Federation, Yoshinobu Tsutsui, made a rare comment this week, calling on the government to intervene in currency markets to prevent excessive yen depreciation, describing recent yen movements as “a bit overdone.”

Market Background and Political Factors

Despite the BOJ raising its benchmark rate on December 19, the yen remains weak against the dollar. With Prime Minister Sanae Takashi planning an early election next month, the yen further declined to an 18-month low this week.

Bloomberg data shows that the 10-year average exchange rate of USD/JPY is 123.20, and over the past two years, the yen has fluctuated roughly between 140 and 161.95. Although the yen briefly touched an 18-month low earlier this week, it rebounded slightly after authorities issued stronger warnings, but the overall downward trend continues to exert pressure on the BOJ's decision-making.

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