## Japan's Central Bank Rate Hike Imminent: Can Policy Rates Break 17 Years of Suppression?

January 24th is just around the corner, and the market is fully prepared for the Bank of Japan's rate hike. According to overnight index swap data, traders have priced in over 80% probability of a rate increase this week, almost fully reflecting the possibility of raising the policy rate from 0.25% to 0.5%—which would mark a new high in 17 years for Japan.

The mainstream voices within the Policy Board lean toward taking action at this monetary policy meeting. Last week, Governor Ueda and Vice Governor Amamiya's comments already set the stage for the market. These signals prompted a rebound in the yen exchange rate, and the market now sees no doubt about an interest rate hike. In contrast, focus has shifted to Ueda's post-meeting speech—looking for clues on the next rate hike timing.

## The Pace of Rate Hikes May Significantly Slow Down

It is worth noting that this will be the first move since July last year. That unexpected rate hike, combined with soft U.S. employment data, triggered a global market crash in early August. This time, the Bank of Japan has evidently learned its lesson, carefully designing communication strategies to stabilize expectations.

Yasunari Ueno, Chief Market Economist at Mizuho Securities, pointed out that after this week's rate hike, a longer pause is highly likely. The central bank's logic is: the closer the policy rate gets to the neutral level, the more cautious and gradual subsequent adjustments should be. Following this reasoning, the interval between the next rate hike and this one could be much longer than the approximately six months between the last hike and this one—especially considering the Upper House election scheduled for July 2025.

## Dual Pressures from Inflation and Exchange Rates

The driving force behind the central bank's rate hike stems from real pressures. Japan's inflation rate has exceeded the 2% target for three consecutive years, and a weakening yen has led to rising import costs. Against this backdrop, Ueda may emphasize the policymakers' continued commitment to normalizing policy.

However, domestic and international risks are accumulating. Although the IMF has raised its global economic growth forecast for 2025, uncertainties surrounding Trump’s policies could disrupt markets and worsen concerns about Japan’s export-driven economy. Domestically, Prime Minister Shigeru Ishiba’s coalition, which is in the minority, faces challenges in advancing the budget in parliament and winning the Upper House election.

DeepMacro CEO Jeffrey Young raised a core question: “Japan has long maintained low growth, low inflation, and low interest rates. Decision-makers, investors, and businesses are still asking—have we really broken free from this predicament?”

## Early Signs of the 2025 Rate Hike Path

IMF Chief Economist Gulan Sha predicts that Japan’s central bank will raise rates twice in 2025 and again twice in 2026. This indicates that policy normalization will be a gradual, long-term process rather than a rapid adjustment.

The quiet period following this week’s rate hike reflects the central bank’s prudence—balancing the need to respond to inflationary pressures while avoiding the market chaos that followed last July’s hike. Under the dual challenges of global economic uncertainty and domestic political variables, every adjustment to Japan’s interest rates will require careful planning, which could become a key focus in the 2025 financial markets.