BOJ Is Said to Heighten Focus on Price Impact of Weak Yen

The Bank of Japan (BOJ) is increasingly focused on how a weak yen may influence inflation, with potential implications for future interest rate hikes after maintaining its current stance of 0.75% in its upcoming decision on January 23 according to Bloomberg. Officials have observed that businesses are becoming more inclined to pass on higher input costs to consumers, raising concerns about the yen's role in driving inflation closer to the central bank’s 2% target as reported. The BOJ has emphasized the importance of monitoring the yen’s impact on household and business price expectations before making further policy moves according to analysis.

The yen has remained weak against the dollar despite the BOJ’s rate hike in December. It recently touched an 18-month low following reports that Prime Minister Sanae Takaichi may call a snap election in February according to Bloomberg. The yen briefly strengthened after these developments, trading at 158.33 per dollar, but its overall weakness continues to weigh on the Japanese economy as data shows.

Japanese business leaders are growing more vocal about the currency's trajectory, with some calling for government intervention to curb excessive depreciation according to reports. This is unusual for major business lobbies like Keidanren, which typically refrain from commenting on foreign exchange matters as noted.

Why Is the BOJ Cautious About Raising Rates Again Soon?

The BOJ has maintained a cautious approach, indicating that the rate of 0.75% will remain unchanged for now according to reports. Officials want to assess the full impact of the recent rate hike before considering further tightening as Reuters reports. Most private economists expect the next rate increase to occur in the summer, with over 75% predicting the key rate will reach 1% or higher by September according to analysis.

The weak yen, while beneficial to exporters, is a growing concern for households and import-dependent industries as Business Times notes. It increases the cost of imported goods, which can fuel inflation and erode consumer spending power. The BOJ has acknowledged the need to balance these competing pressures according to Bloomberg.

What Are the Key Market Reactions to the BOJ’s Policy Outlook?

The yen has shown some resilience after reports of potential government intervention to support the currency according to Business Times. Japan's finance minister, Satsuki Katayama, has expressed concern about the yen’s one-sided depreciation and received tacit support from U.S. Treasury Secretary Scott Bessent as reported.

Market participants have also noted that real wages in Japan fell at the fastest pace since last January, partly due to reduced bonus payments according to Channel News Asia. This has complicated the BOJ’s ability to tie monetary normalization to wage growth as analysis shows.

What Indicators Will Investors Monitor for Policy Changes?

The BOJ will closely watch how the yen affects underlying inflation and price expectations according to Bloomberg. If inflation remains close to the 2% target, the central bank may feel more confident about moving forward with additional rate hikes as reported.

Economists have forecast that the terminal rate could reach 1.5% by the end of 2026, up from a median forecast of 1% a year ago according to Reuters. This suggests a more aggressive tightening path than previously expected, although the central bank is unlikely to rush into action as analysis indicates.

Investors are also watching Japan’s political developments, including the possibility of a snap election in February according to CNBC. Any changes in fiscal policy or monetary stance could influence the BOJ’s decisions and the yen’s trajectory as reported.

What Broader Economic Factors Are at Play?

Japan’s economy contracted more than initially estimated in the third quarter of 2025, shrinking 0.6% quarter-on-quarter according to CNBC. Inflation has also remained above the BOJ’s target for 44 consecutive months as reported. These trends underscore the need for a balanced approach to monetary policy according to Bloomberg.

At the same time, a weaker yen has boosted demand for Japanese travel, with Jeju Air reporting record passenger numbers on routes to Japan as noted. This highlights the mixed economic effects of the currency’s depreciation according to analysis.

What Is the Outlook for Future BOJ Policy Moves?

The BOJ is expected to continue its cautious approach in the coming months, with the next rate hike likely occurring in June or July according to Reuters. Some analysts predict the rate will reach 1.25% by the end of the year as reported. This reflects growing confidence in the central bank’s ability to tighten without triggering a recession according to analysis.

The BOJ will also be influenced by global economic developments, including the U.S. Federal Reserve’s policy direction and the outcomes of key geopolitical events according to Channel News Asia. As long as inflation remains near the 2% target and the yen continues to weaken, the central bank is likely to maintain a steady but watchful approach to monetary policy according to Bloomberg.