The Bank of Japan (BoJ) is widely expected to keep its policy rates steady during its upcoming monetary review this week, signaling a cautious approach to further tightening after surprising the markets with two rate hikes earlier this year. While inflation remains above the 2% target and wages have shown modest growth, analysts believe the central bank will hold off on any additional increases until the year-end.

In March, the BoJ made waves by raising interest rates for the first time in 17 years, ending a negative rate policy that had been in place since 2016. The move was followed by another hike in July, bringing the policy rate to 0.25%, as the central bank responded to persistent inflationary pressures. However, for now, it seems the BoJ will opt for patience, leaving its current target rate between 0.15% and 0.25% unchanged.

Market watchers expect the next possible hike to occur in December, with a projected increase of 25 basis points, bringing the rate to 0.50%. This would align with the BoJ’s cautious yet steady path toward policy normalization, particularly as inflation stays elevated. Real wage growth, which rose by 1.1% in June and 0.4% in July, has sparked some optimism that Japan’s economy may be able to handle tighter monetary policy without stifling growth.

Yet, risks remain. As BoJ Governor Kazuo Ueda noted during a parliamentary session in August, market volatility and potential global recession risks, coupled with a slowdown in China, are factors the central bank cannot ignore. Ueda emphasized that while the BoJ remains committed to achieving its inflation target, it must balance that goal with maintaining economic stability.

Forex traders are closely monitoring how the BoJ’s policy stance might affect the yen, especially as the gap between the Federal Reserve and BoJ’s monetary policies grows. The Fed’s aggressive rate cuts this year have pushed the USD/JPY pair lower, and analysts see further downside risks if the BoJ maintains its current approach.

Economists remain divided on the timing of the next rate hike. A Reuters poll indicated that while no change is expected in September, most foresee at least one more hike before the year-end. Standard Chartered Global Research, for example, predicts a 25-basis-point increase in December, citing persistent inflation and rising wages as key factors that could push the BoJ to act sooner than expected.

As the BoJ’s decision approaches, it appears the central bank is walking a tightrope, balancing the need to control inflation without dampening Japan’s fragile recovery. For now, the BoJ seems content to wait, signaling that any further rate hikes will likely come after careful consideration of both domestic and global economic trends.