The Bank of Japan (BoJ) is gearing up for a pivotal Monetary Policy Meeting, with a potential rate hike dominating discussions. As experts dissect every nuance of the central bank’s approach, the anticipation surrounding Friday’s decision (06:30 GMT/15:30 JST) underscores the complexities of monetary policy in a volatile global environment.

Consensus: A 25-Basis Point Hike Expected

Most analysts expect the BoJ’s Policy Board to approve a 25-basis point increase in the target rate, raising it to 0.50%. This would mark a significant shift in Japan’s monetary policy, with Governor Kazuo Ueda and Deputy Governor Ryozo Himino openly signaling the possibility of a hike in recent weeks.

Citi, in a note issued before Monday’s U.S. presidential inauguration, outlined its forecast: “We expect a 25bp rate hike at the 23-24 January MPM as long as the policies (especially tariffs) expected to be announced at the U.S. Presidential inauguration on 20 January are benign for the global economy and do not cause turbulence in financial markets.”

Tariffs and Trade: A Key Condition

Uncertainty surrounding U.S. President Donald Trump’s trade policies adds another layer of complexity. The BoJ has adopted a cautious stance, mindful of how potential tariff announcements might ripple through financial markets. This aligns with Governor Ueda’s previous remarks that the bank requires more time to assess the implications of U.S. policy and Japan’s domestic wage negotiations.

Domestic Economy: Resilience Amid Wage Growth

The domestic economy appears resilient, bolstered by strong wage growth. According to Barclays’ Naohiko Baba, the 2024 fiscal year marks the largest wage hike in 33 years, with base pay rising 3.6% and smaller firms contributing a 4.5% increase. This trend supports the BoJ’s inflation target of 2%, creating a virtuous cycle between wage growth and inflation.

Such developments, coupled with improving inflation forecasts, signal Japan’s progress toward sustainable economic growth.

Inflation and the Updated Outlook Report

The BoJ’s quarterly Outlook Report, to be released alongside the policy decision, is expected to show a slight upward revision to FY24-25 inflation forecasts. Higher food prices, particularly for staples like rice, are anticipated to push inflation above 2% through FY26.

Barclays notes that while the impact of yen depreciation on inflation has moderated, further depreciation could reignite upward pressure on prices. This outlook strengthens the case for a rate hike, aligning with the BoJ’s broader objectives.

Market Pricing and Communication Challenges

Markets have already priced in a near-certain rate hike, reflecting confidence in the BoJ’s likely course of action. However, communication remains a challenge. JP Morgan’s Ayako Fujita highlighted the difficulty of managing expectations in a policy environment defined by gradual rate hikes.

Citi’s Katsuhiko Alba echoed this sentiment, predicting dovish communication from Governor Ueda. “We expect rather dovish communication, avoiding any suggestions of an imminent hike,” Alba remarked, signaling that clarity on future moves may remain elusive.

As the BoJ navigates the interplay of domestic resilience and global uncertainty, Friday’s decision will be a key indicator of its policy trajectory. While a rate hike appears likely, the central bank’s cautious communication strategy suggests that the path ahead will remain gradual and data-dependent.