Citi Research forecasts that the Bank of Japan will raise its key policy interest rate to 1.25%, building on expectations the central bank first moved toward a 1% target at its June meeting.
The outlook comes as political developments in Tokyo increasingly intersect with monetary-policy considerations. BOJ Policy Board member Toichiro Asada, an appointee under scrutiny, voted against a rate hike in June, while Cabinet Office representative Minoru Kiuchi, Minister of State for Economic and Fiscal Policy, also opposed lifting rates to 1% at that meeting. Both positions contrast with the trajectory Citi now anticipates.
Prime Minister Sanae Takaichi’s administration has pursued a reflationary economic agenda that aligns with certain policy board members, including Ayano Sato, who was appointed by Takaichi. That political alignment is a factor Citi cited in its revised rate projection.
Beyond Japan’s borders, the Federal Reserve’s interest-rate decision, due next week, is expected to heavily influence near-term currency dynamics. U.S. Treasury Secretary Scott Bessent has called for the normalization of Japanese monetary policy following joint currency interventions between Washington and Tokyo.
In foreign-exchange markets, the dollar-yen pair was trading at 154.38, down 1.87, or 1.20%. Citi outlined a range of possible moves for USD/JPY: upside risk toward the 155 yen level, downward pressure potentially pushing the pair toward 152 yen, and a floor around the 150 yen level where the dollar-yen could find support.
The BOJ is scheduled to release its Summary of Opinions on October 1, which will provide further detail on policymakers’ deliberations and the internal debate over the pace of normalization.
