Tokyo: The Bank of Japan (BoJ) is preparing to raise its policy interest rate, currently at 1%, by 25 basis points to the highest level in 31 years due to rising energy costs fueling inflationary concerns and the yen's depreciation. The US-Israel-Iran conflict in the Middle East created and continues to fuel significant inflationary pressures, affecting the Japanese economy alongside other major economies worldwide.

According to Anadolu Agency, rising inflation and growth expectations exceeding estimates strengthened expectations that the BoJ will adopt a tighter monetary policy. Risks to energy supplies via the Strait of Hormuz due to geopolitical risks in the Middle East contributed to inflationary pressures in Japan. Japan's consumer price index (CPI) rose 1.9% year-on-year in July, marking its fastest pace since December 2025. The Japanese economy grew 1.4% in the second quarter, above preliminary estimates.

BoJ Governor Kazuo Ueda may face some pressure from Prime Minister Sanae Takaichi's inner circle as her agenda focuses on supporting economic growth. Sadi Kaymaz, an Asian markets analyst, told Anadolu that the BoJ will likely hike rates for a third time in less than 10 months, while forward-looking messages will be more important than the decision itself on Friday. Kaymaz stated that BoJ members believe the pace of rate hikes will depend on the data, with inflation taking primary focus, as core inflation accelerated for the second consecutive month by rising to 1.8%.

He noted that Japan's core inflation could surpass 2.5% in the second half, while nominal wages increased 4.7% on an annual basis. 'The growth variable is not particularly strong, while public spending is the primary driver of growth,' he said. 'Private consumption remains stagnant.' Kaymaz stated that another rate hike by January 2027 may be on the horizon, as many economists expect. 'Relatively rapid rate hikes could attract Japanese capital to the country,' he said. 'I don't expect Ueda to signal consecutive rate hikes as such a commitment would fuel volatility in the yen and bonds, so I expect Ueda to remain cautious,' he added.