The Bank of Japan may raise interest rates if the economy and price levels develop as expected, says Governor Kazuo Ueda. Even with some global economic issues, growth continues at a steady pace. Private consumption is strong, but rising prices are affecting households, highlighting the need to monitor economic trends closely. US tariffs are impacting manufacturers’ profits, but they do not significantly affect overall capital spending.

The Role Of The Bank Of Japan

The Bank of Japan (BoJ) sets monetary policy with a goal of keeping inflation around 2%. Since 2013, it has followed an ultra-loose monetary policy to support both the economy and inflation in a low-inflation environment. The BoJ’s large stimulus measures have weakened the Yen against other currencies. This change was driven by differing monetary policies of major banks, which depreciated the Yen’s value. However, in 2024, policy changes aimed at tackling inflation began to reverse this trend. A weaker Yen, combined with rising global energy prices, led to inflation in Japan that surpassed the BoJ’s 2% target. Increasing domestic wages also contributed to inflation, prompting the BoJ to adjust its policies in March 2024, moving away from its previous approach. Interest Rate Adjustment Signals The Bank of Japan indicates it may raise interest rates again if the economy continues on its current path. The first historic rate hike occurred in March 2024, and these recent comments suggest that further tightening is likely. Traders view this as a sign that the prolonged period of a weak Yen is about to end. This perspective is supported by strong data. Japan’s national core inflation rate remains above the 2% target, recently hitting 2.2% in October 2025. Additionally, the recent wage increases of over 5% from the 2024 “Shunto” negotiations give early signs of another positive outcome for 2025 talks. Sustained wage growth is crucial for the BoJ’s confidence in raising rates further. As a result, we should expect a stronger Yen in the coming weeks, with the USD/JPY exchange rate likely falling from its current level of 155.65. This is especially relevant as the US Federal Reserve is expected to maintain its current rates or consider cuts for 2026, which would narrow the policy gap that has kept the Yen weak. Options traders might look to buy JPY calls, betting on further appreciation against the dollar. This outlook also presents opportunities in interest rate derivatives. As the BoJ moves towards normalization, Japanese Government Bond (JGB) yields are expected to rise further. Therefore, we should consider strategies that profit from falling bond prices, such as shorting JGB futures, in anticipation of the next policy moves. Create your live VT Markets account and start trading now.

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