Bank of Japan interest rate decision: Will BOJ tighten policy? How it could impact emerging markets like India
Bank of Japan interest rate decision: Even though the monetary policy decision of the Bank of Japan (BoJ) is almost a month away (scheduled for March 18 – 19), speculations have started rising that the central bank may go for a rate hike.
In December, BOJ raised its key policy rate by 25 basis points to 0.75%, which is its highest level since September 1995.
At the current juncture, the stage looks set for further hikes even as the central bank in January projected underlying inflation to reach its 2% target sometime in the second half of fiscal 2026 and remain around that level through fiscal 2027.
Interestingly, Bank of Japan has kept interest rates near or below zero for years to counter deflation. It kept its interest rates as it was even after the COVID pandemic, when global central banks started raising rates due to soaring inflation.
After 17 years, the BoJ ended its era of negative interest rates on March 19, 2024, when it raised rates to a range of 0 to 0.1% from minus 0.1% earlier. Then again, rates were raised on July 31, 2024, to 0.25%. On January 24, 2025, the BoJ raised rates to 0.50% and on December 19, it raised rates to 0.75%.
Will BoJ tighten policy?
There are signals that suggest the BoJ could go for rate hikes in the next two policy meetings.
News agency Reuters, quoting Yomiuri newspaper, reported that Bank of Japan Governor Kazuo Ueda said on Tuesday that the “central bank will continue to raise interest rates if Japan makes progress in achieving its economic and price projections.”
The report further added that Ueda also said that the BoJ will study data before deciding whether to raise interest rates at its March and April meetings.
Debopam Chaudhuri, Chief Economist, Piramal Finance, underscored that Japan finally appears to be pivoting away from the post-1980s asset price bust policy regime towards a new macro environment of higher inflation, a firmer yen and rising borrowing costs.
Chaudhuri highlighted that despite attempts since December, inflationary pressures have failed to subside meaningfully. This should prompt the Bank of Japan to move meaningfully away from its long-standing zero interest rate policy through 2026, allowing bond yields to rise further.
What does it mean for emerging markets like India?
A rate hike will likely elevate bond yields and may trigger some short-term volatility in emerging markets due to fear of further unwinding of the yen carry trade, which can trigger more FII outflows from emerging markets like India.
“For emerging markets, the BoJ rate hike is significant. Higher Japanese yields could unwind decades-old carry trades and redirect global capital flows, tightening external financing conditions just as trade uncertainties are already weighing on inflows. The result is likely to be a more challenging liquidity environment in 2026 for economies reliant on foreign capital for growth,” said Chaudhuri.
However, VK Vijayakumar, Chief Investment Strategist, Geojit Investments Limited, believes it will not be a major negative for the Indian stock market.
“Most of the yen carry trade has already been done as a rate hike from the BoJ is fairly discounted. At most, it can create some short-term volatility in the Indian stock market,” said Vijayakumar.
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