Bank of Japan Expected to Hold Rate at 1 Percent While Raising Growth Forecast

The Bank of Japan is likely to keep its benchmark interest rate unchanged at its meeting this month while raising its assessment of growth, people familiar with the deliberations told The Japan Times. The central bank lifted its policy rate to 1 percent in June, and officials are inclined to pause and assess before moving again.

The caution comes as the yen sits near 160 to the dollar. Japanese authorities have warned of "decisive action" to defend the currency, but that verbal intervention has done little to deter traders betting against the yen, the newspaper reported, underscoring how quickly verbal warnings lose effect when they are not backed by actual currency purchases.

The constraint is structural. Even at 1 percent, Japan's policy rate remains far below its inflation rate, which the war in the Middle East is pushing higher through energy costs, leaving real borrowing costs negative. That gap keeps downward pressure on the yen, because capital flows to currencies that pay more in real terms. Each increment of yen weakness then raises the price of imported fuel and food, adding to the inflation the central bank is trying to contain.

A pause that pairs a stronger growth forecast with an unchanged rate is an attempt to pursue two goals at once, tightening slowly enough to avoid destabilizing the government bond market while hoping the currency stabilizes on its own.