Whether the Bank of Japan will raise interest rates this week depends entirely on Trump's "facial expression"?

According to Zhitong Finance APP, the market generally expects that unless there are any market shocks after the inauguration of the U.S. President-elect Trump, the Bank of Japan will raise interest rates on Friday, which will bring short-term borrowing costs to their highest level since the global financial crisis in 2008.

Tightening policy will highlight the Bank of Japan's determination to steadily raise interest rates from the current 0.25% to close to 1%. Analysts believe that this interest rate level will neither cool down the Japanese economy nor overheat it.

Insiders have indicated that at the two-day meeting ending on Friday, the Bank of Japan may raise the short-term policy interest rate to 0.5%, unless Trump's inaugural speech and executive orders disrupt the financial markets.

Among economists surveyed, about 90% believe that the current price and economic conditions in Japan justify a rate hike by the central bank. About three-quarters of economists expect the central bank to take action this week. Last Friday, overnight swap trading briefly showed that traders had almost fully priced in expectations for a rate hike in January.

Insiders added that upward revisions to price expectations and strong wage growth expectations are among the factors supporting a rate hike.

In a quarterly outlook report, the policy committee is expected to raise its inflation forecast, as more people believe that the expansion of wage growth will put Japan on a sustainable path to achieving the central bank's 2% inflation target.

Economists pointed out that the yen is another factor. The exchange rate of the yen against the dollar has been hovering around the level of 160 yen to 1 dollar. Last year, this level prompted the market to conduct tens of billions of dollars in interventions to support the yen. A rate hike would narrow the interest rate gap between the U.S. and Japan, thereby boosting the yen.

If the Bank of Japan raises interest rates, it will be the first rate hike since July of last year, when the Bank of Japan raised rates, coupled with weak U.S. employment data, which shocked traders and triggered a global market crash in early August.

To avoid such a situation from happening again, Bank of Japan Governor Kazuo Ueda and his deputy sent clear signals last week that they would consider the necessity of raising borrowing costs at the upcoming meeting, thereby providing the market with a "preventive shot."

Some observers of the Bank of Japan interpreted these remarks as a hint that the central bank is preparing to take action as it attempts to improve communication clarity at the top levels.

Last month, there were also signs that action would be taken soon. Although the Bank of Japan postponed a rate hike at its meeting on December 18-19 last year, hawkish member Naoki Tamura proposed a rate hike The meeting minutes show that other committee members also believe that the conditions for an upcoming interest rate hike are in place.

As the tightening of policies this week has almost become a foregone conclusion, market attention is shifting to the press conference following Ueda Kazuo's meeting, seeking clues about the timing and pace of subsequent interest rate hikes. With Japan's inflation rate exceeding the central bank's 2% target for nearly three years and the weak yen keeping import costs high, Ueda Kazuo may emphasize the determination of policymakers to continue raising interest rates.

However, some analysts believe that the Bank of Japan still has ample reason to remain cautious. Although the International Monetary Fund (IMF) has raised its forecast for global growth in 2025, Trump's policies could undermine market stability and exacerbate the uncertainty surrounding Japan's export-dependent economic outlook.

Domestic political uncertainty may also intensify, as the minority coalition led by Prime Minister Shigeru Ishiba may struggle to pass the budget in parliament and win the upcoming Senate elections scheduled for July.

The economic losses caused by the historically bumpy interest rate hikes also haunt the policymakers at the Bank of Japan. The Bank of Japan ended its quantitative easing policy in 2006 and raised the short-term interest rate to 0.5% in 2007, which triggered a political backlash as critics argued that this move delayed the end of deflation.

In October 2008, the Bank of Japan lowered the interest rate from 0.5% to 0.3%, and then to 0.1% in December of that year, as the global financial crisis plunged Japan into recession. Since then, various unconventional measures have kept borrowing costs close to zero.

Jeffrey Young, CEO of DeepMacro, stated, "Japan has long been in a low-growth, low-inflation, and low-interest-rate environment. Therefore, policymakers, investors, and the business community are still puzzled—have we really escaped this situation?"

"The Bank of Japan will have to explain very cautiously that their interest rate hikes are aimed at moving away from the unconventional policies they have adopted."