The Bank of Japan (BoJ) is expected to keep its policy rate at 0.75% tomorrow, focusing on economic growth, inflation trends, and the impact of a weaker yen rather than political developments. With JGB yields and financial conditions under scrutiny, the BoJ is likely to maintain its current stance, emphasizing short-term tenors and carefully balancing support for economic recovery with inflation objectives, ING's Senior Economist Min Joo Kang notes.

BoJ balances growth, inflation, and geopolitical risks

"We expect the Bank of Japan to keep its policy rate at 0.75% tomorrow. The BoJ will maintain its focus on assessing economic growth and inflation trends rather than commenting on recent political developments related to the snap election scheduled for February. Although the BoJ is expected to revise its GDP outlook upward, it will try to balance trade tensions with China and geopolitical risks surrounding Greenland. BoJ Governor Ueda is unlikely to signal more rate hikes and instead address how the weaker yen affects domestic inflation. On the recent surge in JGB yields, he is expected to reiterate that market forces set rates, though authorities have tools to manage risks if needed."

"The Ministry of Finance has the flexibility to rebalance bond issuance by tenor, reducing issuance of longer-term bonds while increasing issuance of shorter-term bonds. This trend is already shown in the current fiscal year’s budget plan. The BoJ may also adjust the pace of JGB purchases, though the likelihood remains low. We expect the BoJ to place greater emphasis on short-term tenors. These are more closely linked to real economy and financial conditions, such as mortgages, consumer lending, and corporate credit markets. For example, in January, Japanese MEGA banks raised their fixed mortgage rates, which now range from 2.5% to 5%. The BoJ will be analyzing the potential impacts of these changes on the broader economy."

"We believe that JPY is an important factor in determining the BoJ's rate hike. But at the same time, the BoJ is likely to avoid rapid rate hikes that could slow down economic recovery. This makes for a difficult balancing act. In our view, we should monitor the financial conditions and its impact on growth as well as inflation. We expect inflation to ease quite meaningfully in 1Q26, which will prompt the BoJ to maintain its current stance."