With a snap election now slated for February, and foreign exchange intervention rhetoric at its highest level since 2024, the Bank of Japan’s January meeting will take place under far more dramatic circumstances than many investors would have guessed going into the year.
On Monday, Prime Minister Sanae Takaichi is expected to announce a February 8 general election as she seeks to convert her high personal popularity into a sizeable parliamentary majority.
Will the resulting uncertainty dampen pressure on the BoJ to raise rates?
Most economists expect the central bank to stick to its usual strategy of refraining from adding complexity at moments of political upheaval and leave rates at their current level of about 0.75 per cent.
But any hints about a possible rate rise in March will be closely scrutinised by already volatile markets after Tokyo-listed equities surged to all-time highs last week, and yields on long-dated Japanese government bonds also reached record levels.
The yen is meanwhile hovering near an 18-month low of about ¥158 to the dollar, and near an all-time low against the euro. The Japanese currency recovered slightly at the end of last week, mostly because market speculation continues to swirl around the possibility of intervention by the Japanese authorities to prop up the currency.
Finance minister Satsuki Katayama said on Friday she “will not rule out any options” to support the yen, whose persistent weakness is driven by the still very low level of Japanese interest rates relative to other economies and by the perceived risk of big fiscal expansion under Takaichi.
“There is a growing view that the BoJ may be placing greater weight than before on the possibility that yen depreciation could heighten inflationary pressures through import prices, and that the monetary policy reaction function may become somewhat more responsive to foreign exchange developments,” said Shoki Omori, chief desk strategist at Mizuho Securities. Leo Lewis
Will UK inflation derail BoE rate cut expectations?
Investors will be closely monitoring Tuesday’s UK labour market data and inflation figures on Wednesday for signs of how much further the Bank of England is likely to go in lowering interest rates this year.
Economists polled by Reuters expect inflation to tick up to 3.3 per cent in December, from 3.2 per cent in November, with services inflation up to 4.5 per cent from 4.4 per cent.
That is widely expected to be the last bump before a decline towards the 2 per cent BoE target this year. However, a larger uptick could dampen optimism over the ability of the central bank to cut borrowing costs, while a surprise decline could prompt financial markets to increase their bets for a cut as soon as February.
In December, the BoE said it expected inflation to ease to about 3 per cent in the first quarter of 2026, after an expected temporary rise in December, due to an increase in tobacco duty and a pick-up in airfares price inflation.
The bank lowered its inflation expectations for the second quarter to closer to 2 per cent, thanks to reductions to regulatory costs levied on households’ energy bills announced in November’s Budget, and declines in oil and gas prices.
Economists also expect some further easing in wage pressures with regular annual pay growth slowing to 4.5 per cent in the three months to November from 4.6 per cent in the three months to October, which would eventually feed into lower inflation.
They will pay special attention to the private sector regular pay data, for which analysts expect to see a decline to 3.7 per cent in the three months to November, down from 3.9 per cent in the previous three months, supporting the case for lower interest rates. Valentina Romei
Will the S&P 500 top 7,000?
Wall Street’s S&P 500 has made a steady start to 2026, rising by just over 1 per cent over the past two weeks to within touching distance of 7,000 points.
Propelled by technology stocks expected to benefit from the AI boom, the index surged to a series of record highs in late 2025 as it recovered from an April sell-off triggered by President Donald Trump’s “liberation day” tariffs, which have been watered down.
However, this year’s gains for the S&P 500 — which continues to trail big European and Asian indices after underperforming in 2025 — have been driven by a different cohort of stocks.
Banks and tech stocks are the two worst-performing sectors so far this year, with industrials, energy groups and materials having emerged as market leaders in the two weeks of the year.
A bespoke index tracking the 20 largest stocks in the S&P 500 by market capitalisation, which account for about half the index’s value, has fallen by about 1 per cent year to date, according to Michael O’Rourke at Jones Trading.
“The new year has started in a similar vein to how the previous one finished, with investors looking for diversification outside US equities and Big Tech,” said Barclays equities strategist Emmanuel Cau. “Within the US market, small caps and less tech heavy indices are outperforming the S&P 500 and Nasdaq.”
If and when the S&P 500 passes through the 7,000 mark for the first time, the past two weeks suggest it will be stocks away from Wall Street and Silicon Valley that push it over the line. George Steer
