Factbox-How likely is the Bank of Japan to raise interest rates this week? Via Reuters

By Leika Kihara

(Reuters) – The Bank of Japan concludes its first policy meeting of the year on Friday with the outcome to be announced days after the inauguration of US President Donald Trump.

Here’s a guide to what to expect and why the BOJ’s rate review is important:

WHEN IS THE BOJ MEETING?

The BOJ’s monetary policy board is holding a two-day meeting that ends on Friday. It will announce its conclusions at the end of its deliberations.

The BOJ ended years of negative interest rates in March and raised its short-term policy target to 0.25% in July. It has indicated readiness to hike again if earnings and prices move as expected.

WILL BOJ LOWER RATE RISE?

There is growing confidence within the BOJ that the conditions for another hike will be in place. The economy continues to grow moderately and inflation has remained above its 2% target for almost three years.

Companies are continuing to pass on rising raw material and labor costs to consumers, suggesting the BOJ board may revise up its inflation forecasts in the quarterly report after the meeting.

More importantly, there have been increasing signs that firms will offer higher wages for the third year in a row in annual wage talks with unions that begin in March.

Local branch managers of the BOJ said that the wage hike is spread across companies of all sizes and sectors, meeting the critical need to raise interest rates. Therefore, the central bank is likely to raise rates to 0.5% on Friday.

WHAT HAVE THE BOJ POLICE PEOPLE SAYED SO FAR?

The BOJ’s views on wages and the outlook for US policy are being watched closely by markets, after Governor Kazuo Ueda cited uncertainty over the outlook for domestic wages and Trump’s policies as reasons to hold back. raising rates last month.

In a January 14 speech, Deputy Governor Ryozo Himino said wage growth is likely to remain strong this year. A day later, Ueda confirmed the optimism with a sign of the BOJ’s confidence that Japan is making progress towards its inflation target.

Both Himino and Ueda said the BOJ would debate whether to raise rates this month, indicating a strong possibility of a hike.

WHAT CAN HAPPEN TO POLICE OFFICERS?

With rising expectations for stable incomes, the only remaining obstacle to raising rates has been the risk of Trump dropping the bomb and developing financial markets.

Vice Governor Himino said he will seek information on the “measurement and schedule” of the new president’s policy measures, as well as anything that Trump has not flagged so far.

A global rally this week eased policymakers’ fears that Trump’s tariff threats could cause market turmoil, increasing the likelihood of a price hike on Friday.

HOW MIGHT THE MARKET MOVE FOR JAPANESE SECURITY?

Betting that further rate cuts by the US Federal Reserve mean that the US-Japan interest rate differential will remain wide, keeping the yen under downward pressure.

A rate hike by the BOJ could briefly weaken the yen. But the gains could be short-lived unless Ueda gives a hawkish view on his post-convention outlook.

WHAT OTHER MARKETS SHOULD BE CONSIDERED?

The BOJ will release a quarterly outlook report with revised growth and price forecasts, which will show how confident the board is about Japan’s expectations of hitting a sustained 2% inflation rate . That will affect the pace of rate increases in the future.

Ueda may also provide details on the timing and pace of the move forward in his post-meeting interview.

The key would be the governor’s view of Japan’s neutrality. BOJ staff estimates show the actual inflation-adjusted neutral rate to be in the range of -1% to +0.5%. That means that if inflation were to hit the BOJ’s 2% target, it could raise the short-term rate to at least around 1% without cooling growth.

Based on the October forecast, the BOJ expects short-term rates to approach what it considers neutral in the “last half of the three-year projection horizon” through March 2027, which suggesting a period beyond October 2025.

While hawkish board member Naoki Tamura projected the neutral rate to be around 1%, Ueda said it was too difficult to produce reliable estimates due to a lack of data.

WHAT’S NEXT?

Most analysts expect the BOJ to keep raising rates at a rate of about twice a year. If the BOJ did raise rates on Friday, it will likely remain on hold until the latter half of this year when it becomes clearer about the impact of Trump’s policies.

Domestic politics also complicate the timing of the BOJ’s rate hike and upper house elections scheduled for July, where Prime Minister Shigeru Ishiba’s minority party may struggle to win votes. The BOJ may choose to avoid policy changes until the political dust settles.