The Bank of Japan (BOJ) is anticipated to maintain its policy rate at 1.25% following its two-day meeting concluding on Friday, according to a survey of economists. This decision comes after the bank's recent rate increase, which brought rates to their highest level in 31 years. However, the possibility of a rate hike remains on the horizon, with expectations of a move in the coming months.
All 16 respondents in the survey foresee the BOJ holding steady for now, but they also predict that the bank will prepare the groundwork for future rate increases. The driving factors behind this expectation include rising domestic inflation and wages. Homin Lee, a senior macro strategist at Lombard Odier, noted that macroeconomic conditions support further policy tightening, although he cautioned that consensus within the policy board might not be strong enough for consecutive hikes due to vulnerabilities in the domestic bond market.
Despite the anticipation of future rate hikes, some economists, like Sosuke Nakamura from Citi Research, argue that there are no clear indicators of accelerating inflation that would necessitate immediate consecutive rate increases. Japan's core inflation, excluding fresh foods, rose by 2.1% in September compared to the previous year, marking the highest level this year. This increase is attributed to a weak yen, which raises import costs, and high energy prices, despite government subsidies aimed at mitigating energy costs for consumers.
In addition to inflation, Japan's inflation-adjusted wages have been on the rise for eight consecutive months, increasing by 1.5% in August from a year earlier. This trend suggests the potential for wage-driven inflation. Finance Minister Satsuki Katayama recently informed lawmakers that Japan is on the brink of entering a period of sustained inflation driven by rising wages, while also acknowledging the impact of higher import costs on prices.
As the BOJ prepares to release its monetary policy statement, analysts like Ryutaro Kimura from BNP Paribas Asset Management are keen to see if the bank will adjust its language regarding inflation. The current phrasing suggests that underlying CPI inflation is approaching 2%, but there is speculation that it may be updated to indicate it has reached this level.
Yen and Bond Market Outlook
The yen's performance against the U. S. dollar is another focal point, with nine respondents predicting it will trade between 157 and 158 over the next month. The three-month outlook is more varied, with estimates ranging from 150 to 160. Masahiko Loo, a senior fixed income strategist at State Street Investment Management, commented that BOJ normalization, higher domestic yields, and shifting institutional flows should gradually narrow the rate differential and attract capital back to Japan. However, he noted that elevated U. S. yields might prevent a straightforward yen rally.
Recent market activity saw the yen strengthen against the dollar and Japanese government bond yields fall, driven by safe-haven demand amid a sell-off in AI stocks. This was a reversal from earlier in the month when Prime Minister Sanae Takaichi's spending plans and a global bond sell-off exerted pressure on these assets.
Looking ahead, nine respondents expect the yield on the benchmark 10-year Japanese Government Bonds (JGBs) to rise to between 3% and 3.1% by year's end, up from the current 2.809%. Similarly, seven respondents anticipate the yield on the 30-year JGB to increase to 4% to 4.1% from 3.829% as of Tuesday. Analysts expect the BOJ to resume tightening after an anticipated pause in October.
As the BOJ prepares for its quarterly outlook report in January, which will assess economic activity and prices, 13 respondents predict a terminal rate of 1.75% to 2% by mid-2027. Masato Koike, a senior economist at SOMPO Institute Plus, stated that the policy rate is nearing the neutral level of 2%, the BOJ's inflation target. However, he emphasized the need to avoid excessive downward pressure on growth, suggesting that the BOJ might halt rate hikes at around 1.75%.
The survey, conducted from October 14 to 26, included insights from 16 economists and analysts, reflecting a cautious yet optimistic outlook for Japan's economic trajectory.
