The Bank of Japan is set to announce its latest monetary policy decision on Friday, with a clear majority of economists expecting a quarter-point rate rise to 0.50 per cent. If delivered, it would mark the first back-to-back rate increase since 2007 and underscore the central bank’s determination to normalise policy after decades of ultra-low interest rates.
The move comes as Japan’s core consumer price index remains stubbornly above the BOJ’s 2 per cent target, and as wage growth — a key condition for further tightening — shows signs of broadening. Analysts at Nomura note that the BOJ’s updated quarterly outlook, also due this week, is likely to revise up inflation forecasts for fiscal 2025 and 2026, providing the rationale for a more aggressive path.
For global markets, the key risk lies in the BOJ’s forward guidance. Should Governor Kazuo Ueda signal further tightening ahead, the yen could strengthen sharply against sterling and the dollar. A stronger yen would reduce the cost of Japanese imports for UK businesses, potentially easing some inflationary pressure, but it would also make holidays to Japan more expensive for British travellers.
UK pension funds and insurers have significant exposure to Japanese government bonds, which have already sold off in recent weeks. The yield on the 10-year Japanese government bond has climbed to 1.15 per cent, its highest level since 2011, reflecting bets on tighter policy. Rising Japanese yields could increase the cost of hedging for UK institutions and feed through to higher funding costs for some corporate borrowers.
“The BOJ is walking a tightrope,” said Jane Foley, senior currency strategist at Rabobank. “A hawkish surprise could trigger a sharp adjustment in yen crosses, with knock-on effects for UK import prices and bond markets. For UK investors holding Japanese equities, a stronger yen would also reduce the sterling value of those holdings.”
The FTSE 100 has been relatively resilient this month, trading around 8,200 points, but a sudden yen rally could weigh on multinationals such as Unilever and Diageo, which generate large revenues in Asia. The broader implication for UK households is that a stronger yen may keep a lid on imported inflation from Japan, particularly in electronics and cars, but could also signal global capital flows shifting away from risk assets.
Source: Nomura, Rabobank, Bloomberg