The Bank of Japan's decision is coming tomorrow! Interest rates will remain unchanged, "set in stone," and inflation forecasts may be raised

According to the Zhitong Finance APP, the Bank of Japan will announce its interest rate decision and economic outlook report this Thursday. The market generally expects the Bank of Japan to maintain the benchmark interest rate at 0.5% and may raise the inflation forecast for this fiscal year. After the US-Japan trade agreement reduced some uncertainties, investors are looking for signs of another rate hike this year.

The main focus of this meeting will be whether the Bank of Japan will raise interest rates again this year. Currently, the market estimates the probability of a rate hike before the end of the year to be about 75%. According to informed sources, after the US-Japan trade agreement eliminated a key uncertainty factor, Bank of Japan officials may consider raising rates again.

However, the Bank of Japan is currently not considering a sudden rate hike as it still needs to assess the actual impact of tariffs. Bank of Japan Deputy Governor Masayoshi Amamiya stated last week that although the agreement is a significant breakthrough, uncertainty remains high.

Nevertheless, market expectations for another rate hike by the Bank of Japan are heating up, with October becoming a potential timeframe for the next rate increase. Last week, Deutsche Bank Securities and Barclays Securities both brought forward their rate hike expectations to October.

The United States and Japan unexpectedly reached a trade agreement on July 22, setting most tariffs at 15%. Previously, the European Union and the United States also reached a similar agreement, alleviating concerns about the global economy.

Informed sources revealed that Bank of Japan officials believe the outcome of the negotiations is broadly in line with expectations, so there may be no need for significant adjustments to the Bank of Japan's overall economic outlook.

In the outlook report released in April, the Bank of Japan stated that due to the impact of tariffs, economic growth is expected to temporarily stagnate, followed by a rebound, allowing the potential inflation rate to reach its target level between October next year and March 2028.

The Bank of Japan's inflation expectations are lower than economists' forecasts.

Observers of the Bank of Japan expect it to raise the average inflation forecast for this fiscal year from 2.2% to 2.5%, while keeping the inflation forecast for the next two years unchanged.

Former Chief Economist of the Bank of Japan, Hideo Hayakawa, stated that strong prices will enable the Bank of Japan to raise its inflation forecast for next year, but the bank may keep the inflation rate below 2% to avoid excessive speculation about rate hikes.

The Federal Reserve will announce its interest rate decision hours before the Bank of Japan, and its conclusions and signals may significantly impact the yen's movement. As of Tuesday, the yen had recorded its largest decline against the US dollar in three months, while both the Federal Reserve and the Bank of Japan maintained a wait-and-see attitude.

After US President Donald Trump repeatedly warned Japan not to gain trade advantages through currency depreciation, the Bank of Japan needs to strike a delicate balance to avoid appearing overly cautious in raising borrowing costs.

This is the first meeting of the Bank of Japan since the ruling coalition led by Prime Minister Shigeru Ishiba faced a historic defeat in the July 20 Senate elections. The election reflected strong public dissatisfaction with inflation. As the Ishiba government currently holds no majority in both houses of Congress, this Japanese leader has faced calls for resignation from both ruling and opposition party members Like most other central banks, the Bank of Japan typically does not comment on political issues, but political instability may complicate policy-making. After various political parties promised cash subsidies or tax cuts ahead of the elections, the Bank of Japan needs to closely monitor the impact of fiscal policy on inflation and bond yields.

Bank of Japan Governor Kazuo Ueda will hold a monetary policy press conference at 14:30 Beijing time on Thursday to provide detailed explanations regarding the interest rate decision and economic outlook