By Leika Kihara
TOKYO, June 16 (Reuters) - The Bank of Japan is set to raise interest rates to a 31-year high on Tuesday, marking another landmark step in normalising monetary policy as it focuses on taming price pressures from the energy shock caused by the Iran war.
The decision would mark a more aggressive approach by the BOJ in dismantling the remnants of the radical stimulus of Governor Kazuo Ueda's predecessor and another step in becoming a more conventional central bank that prioritises fighting
inflation.
All eyes will be on how the peace deal between the U.S. and Iran, which could ease global inflationary pressures, affects the BOJ's communication on the pace and timing of further interest rate hikes.
Deputy Governor Shinichi Uchida will hold a press briefing after the meeting, which Ueda will miss for a two-week treatment in hospital for an infected liver cyst. Ueda will not vote, leaving the decision in the hands of eight board members - seen mostly in favour of a rate hike.
Uchida is likely to reiterate the BOJ's resolve to continue raising rates, but avoid giving explicit hints on the next rate-hike timing given lingering uncertainty over the Middle East, the central bank's former top economist Seisaku Kameda said.
"Uchida is good at communicating with constructive ambiguity. With so much uncertainty over the outlook, he will signal the BOJ's readiness to respond nimbly," Kameda said, predicting a hike in June and then another in October-December.
WEAK YEN PRESSURE
At the two-day meeting ending on Tuesday, the BOJ is widely expected to raise its short-term policy rate to 1% from 0.75%, taking borrowing costs to levels unseen since 1995.
The hike would be the first since December and align the BOJ with other central banks shifting towards tighter policy to combat inflation, including the European Central Bank.
The Middle East conflict has complicated the BOJ's policy path by adding inflationary pressure through higher oil costs, while hurting an economy heavily reliant on imported fuel.
The BOJ kept policy steady at its previous meeting in April but sharply revised up its price forecasts and stressed its vigilance to the risk of an inflation overshoot. Three of its nine board members proposed a hike to 1%.
A flurry of hawkish BOJ signals since then have led markets to almost fully price in the chance of a June rate increase. A Reuters poll showed economists projecting the BOJ to raise rates to 1.25% in the fourth quarter after a hike in June to 1%.
While government subsidies have kept core consumer inflation below the BOJ's 2% target, analysts expect price pressures to broaden with wholesale inflation spiking to a 3-year high of 6.3% in May.
A weak yen, which pushes up import prices and broader inflation, will also keep the BOJ under pressure to stay on course for further rate hikes, analysts say.
(Reporting by Leika Kihara; Editing by Sam Holmes)
