Rising risks to energy supplies from the U.S.-Israel-Iran conflict in the Middle East have strengthened expectations of a Bank of Japan policy rate hike. The bank is expected to raise the rate by 25 basis points to 1.25%, which would take it to its highest level in 31 years.
Higher energy costs, the yen’s depreciation and inflation concerns have become the main factors behind expectations of a rate hike. Concerns about energy supplies through the Strait of Hormuz are also adding to inflationary pressures in Japan.
Price and growth forecasts exceeded
Japan’s consumer price index rose 1.9% year on year in July, marking the fastest increase since December 2025.
The economy grew 1.4% in the second quarter, outperforming initial estimates. Inflation and growth indicators exceeding forecasts have increased expectations that the Bank of Japan will pursue a tighter monetary policy.
Bank of Japan Governor Kazuo Ueda could face pressure from Prime Minister Sanae Takaichi’s inner circle, which is focused on supporting economic growth.
Markets will focus on guidance after the decision
Asia markets analyst Sadi Kaymaz said the bank was expected to deliver its third rate hike in less than 10 months. Kaymaz said the forward guidance to be issued on Friday could be more important than the rate decision itself.
Kaymaz said bank officials viewed the pace of rate hikes as dependent on economic data and regarded inflation as the priority. He said core inflation had accelerated for a second consecutive month to 1.8% and that the indicator could exceed 2.5% in Japan in the second half of the year.
Kaymaz said nominal wages had risen 4.7% year on year, while noting that the growth indicators were not particularly strong. He said public spending was the main driver of growth, while private consumption remained stagnant.
Kaymaz said a new rate hike could be considered in January 2027, in line with the expectations of a significant share of economists, and that relatively rapid rate increases could attract Japanese capital back to the country.
Kaymaz said he did not expect Ueda to signal consecutive rate hikes, adding that such a commitment could increase volatility in the yen and bond markets. He said the bank governor would therefore remain cautious.
