Japanese interest rates will hit a 17-year high! The central bank's rate hike is a certainty, what are the key points to watch in 2025?

Hiking cycle on the horizon, market bets reach 80%

On January 24th, the Bank of Japan is set to announce its interest rate decision, with little suspense this time. According to overnight index swap data, traders’ bets on a rate hike this week have reached 80%, and the market has largely priced in the January rate increase. Several insiders have revealed that most members of the Bank of Japan Policy Board lean toward raising interest rates, which would lift Japan’s benchmark rate from 0.25% to 0.5%, hitting a 17-year high.

This rate hike is not without complexity. The last increase was in July of last year, when an unexpected decision triggered global market turmoil, even causing a global stock market crash in early August. Learning from this, the Bank of Japan has come prepared this time. Governor Ueda and Vice Governor Amamiya have recently been signaling frequently, preemptively shaping market sentiment. The yen has also rebounded as a result, and market stability has improved noticeably.

What do experts think? Market focuses on the pace of rate hikes

Since a rate hike seems almost certain, investors and analysts are turning their attention to a more critical question: what happens next?

Yasunari Ueno, Chief Market Economist at Mizuho Securities, offers his view — after this week’s hike, the Bank of Japan is likely to enter a prolonged pause. His reasoning is that as policy rates gradually approach neutral levels, the central bank needs to adopt a more cautious, incremental approach. In other words, the next step after this rate increase won’t come too quickly.

Considering the Upper House election in July, the timeline is further compressed. Ueno believes the interval between this rate hike and subsequent ones will be longer than the six months between the July hike and now.

The IMF’s Chief Economist Gopinath’s more specific forecast: the Bank of Japan will raise rates twice in 2025 and again twice in 2026. This indicates that the normalization process will proceed slowly and in an orderly manner.

Inflation remains high, central bank stance remains firm

Why the need to hike rates? Japan’s inflation rate has exceeded the 2% target set by the central bank for three consecutive years. Coupled with the persistent weakness of the yen pushing up import costs, price pressures remain relentless. Ueda is likely to reiterate the central bank’s commitment to normalization in subsequent statements.

Risks cannot be ignored, policy uncertainties increase

However, the road to rate hikes is not without obstacles. On one hand, the IMF has raised its global economic growth forecast for 2025, but policy uncertainties, such as potential shifts in Trump-era policies, could disrupt markets and put pressure on Japan’s export-driven economy.

On the other hand, domestic politics also carry uncertainties. Prime Minister Shigeru Ishiba’s minority party coalition’s position in parliament is fragile, and passing the budget and the July Upper House election will be tests.

DeepMacro CEO Jeffrey Young points out deeper concerns: “Japan’s long-term growth, inflation, and interest rates remain low, and the market is still asking: Have we really emerged from the trough?” This question reflects market worries about the sustainability of Japan’s economic recovery.

Investment implications

In short, the Bank of Japan’s rate hike this week is almost certain, but the pace of subsequent hikes will slow down. There are expected to be two more rate increases in 2025, but with longer intervals. For investors, attention should be paid to Ueda’s language and the impact of global policy shifts on Japan’s economy.