The Bank of Japan is expected to raise interest rates to a 30-year high, and forward guidance will be the focus of the market.

The Bank of Japan is expected to raise its benchmark interest rate to the highest level in thirty years on Friday, indicating that the decision-making level's confidence in achieving the stable inflation target is strengthening. It is widely expected in the market that after the two-day policy meeting, the Bank of Japan will raise the overnight call rate by 25 basis points to 0.75%. This is the first rate hike by the Bank of Japan since January. Due to two members publicly calling for a rate hike in the previous two meetings, the market expects this decision to be approved unanimously. If successful, this will be the first time Governor Haruhiko Kuroda has received unanimous support from the board on the rate hike issue during his tenure. Earlier this month, Kuroda gave a rare clear signal of a rate hike, which was further reinforced by a series of economic data. Data shows that wage growth momentum in Japan remains solid, and the impact of U.S. tariffs on the Japanese economy is less than previously feared. This marks the first time since Kuroda took office that all observers of the Bank of Japan in media surveys have unanimously predicted a rate hike. With the rate hike nearly a foregone conclusion, the market's focus now shifts to how the Bank of Japan will outline the future rate path. Insider sources revealed that even if the rate is raised to 0.75%, some officials within the Bank of Japan still believe that the policy rate has not reached the so-called "neutral rate," with some officials even considering 1% to be still low. The neutral rate is typically defined as the level of interest rate that neither stimulates nor suppresses economic growth. Normally, a rate hike helps boost the yen exchange rate, but since this action has been fully priced in by the market, if the central bank releases a dovish signal in the forward guidance, it could lead to a weakening of the yen. If the exchange rate approaches the key level of 160 yen per dollar again, financial authorities may be forced to reconsider intervention in the market. On the other hand, if the Bank of Japan sends a more hawkish signal, it may help alleviate pressure on the yen, but it could also reignite a rapid rise in Japanese government bond yields. This outcome may cause concern for the Suga administration, currently planning the budget for the next fiscal year. If this rate hike goes through, Japanese rates will rise to the highest level since 1995. In that year, Japan was in the early stages of the economic fallout from the burst of the asset bubble, leading to decades of stagnation. However, today's economic environment has significantly changed, meaning that Kuroda is leading the Bank of Japan into uncharted territory and seeking to retain maximum flexibility in future policy paths. Interest rate swap markets indicate that traders currently estimate a 95% probability of a rate hike at this meeting, nearly doubling from the beginning of last month. As per tradition, the Bank of Japan will release its policy statement around noon, followed by Kuroda's press conference at 3:30 pm. Analysts suggest that since the market has fully digested the rate hike expectations, the focus will be on Kuroda's remarks at the press conference. It is expected that he will maintain a cautious tone to avoid giving clear signals on the timing of the next rate hike. Looking ahead to the details of policy communication, the Bank of Japan may emphasize that the financial environment remains accommodative, hinting at further room for rate hikes in the future. Even with a raise to 0.75%, Japanese rates are still low compared to major economies, and the inflation rate has been running at or above the Bank's 2% target for over three years. Furthermore, the market will closely watch how Kuroda describes the "neutral rate." The Bank of Japan's previous range was 1% to 2.5%, and any significant upward adjustment could imply a greater tightening space than previously expected. Some observers predict that Kuroda may start by discussing the concept of the "natural rate" before explaining it in the context of the 2% inflation target. Balancing between hawkish and dovish signals is considered the core challenge for Kuroda at present. The central bank governor, who transitioned from academia, tends to emphasize reasons for action during rate hikes and leans towards more dovish expressions when maintaining the status quo. Considering that Prime Minister Suga has always advocated for economic stimulus, the future communication between Kuroda and the government on the issue of rate hikes is also under close scrutiny. Some analysts will pay attention to whether government representatives express concerns about this rate hike. If the voting results on Friday pass as expected, it will also be the first time that Kuroda has received unanimous support during his tenure at the Bank of Japan in the four rate hikes.