By Megumi Fujikawa


THE EXPECTATION: The Bank of Japan looks set to raise interest rates this week, unless what Donald Trump says in his inauguration address as U.S. president on Monday rattles financial markets, according to people familiar with the central bank's thinking.

Market expectations for an imminent rate increase have gathered steam over the past week as Gov. Kazuo Ueda and one of his deputies pledged to discuss whether to raise the policy rate from the current 0.25% at a two-day meeting ending Friday.


THE CHECKPOINTS: Ever since the central bank held policy settings steady at its previous meeting in late December, Ueda has repeatedly said that wage trends in Japan and U.S. economic policies will be important factors in deciding the next rate hike. He has also said that he wants to see "one more notch" of positive data to feel more confident in making a decision.

Policymakers generally agree that Japan's domestic economy is on track to reaching the bank's goal of stable 2% inflation backed by wage growth, but the unpredictability of Trump's remarks suggests that the BOJ's decision will be a close call. If Trump announces immediate measures that stoke expectations of inflation and potentially fewer Federal Reserve cuts, that could prompt central bankers elsewhere to review their own monetary policy paths.


JAPAN WAGES: BOJ policymakers have been growing more confident about wage growth in Japan after hearing positive feedback from local companies gathered by central bank branch managers recently, people familiar with the bank's thinking said. Japan's largest labor union group is seeking a more than 5% pay raise this year, while some major companies, such as Uniqlo owner Fast Retailing and beverage maker Suntory, have already promised strong salary bumps.

The central bank doesn't necessarily have to wait for the preliminary results of annual wage negotiations--due mid-March--said some of the people familiar with the BOJ's thinking. "If the BOJ waits too long, it may give markets an overly dovish impression," one of the people said.


TRUMP RISKS: Trump could give more insights into his plans for key measures including additional tariffs and immigration restrictions at his inaugural address. How the markets will react is likely to affect the BOJ's decision this week, as it will likely take time for details and the actual effects of his measures to become apparent.

If Trump says something surprising that makes markets nervous, the BOJ will likely hold fire. "The BOJ is raising interest rates only at a moderate pace anyways, so the bank doesn't have to force a hike when conditions are unstable," one of the people said.


WHAT'S NEXT? Regardless of what it decides on Friday, the BOJ is likely to keep adjusting monetary conditions through the year by eventually lifting interest rates toward a level it considers to be neutral for the economy. Given the yen's continued weakness combined with solid wage growth, policymakers see less risk of Japan's resurging price trends reversing course and missing the target of sustainable 2% inflation.


Write to Megumi Fujikawa at megumi.fujikawa@wsj.com


(END) Dow Jones Newswires

01-20-25 0143ET