Reuters poll: BoJ rate hike expected in December rather than October

Expectations favour a December rate hike by the Bank of Japan, with a majority of economists in a Reuters poll forecasting what would be its third increase since June.

Higher prices and a weaker Yen pose challenges for Japan as a net energy importer, prompting more forecasters to anticipate at least two rate hikes in 2027. Energy costs climbed as the US-Iran conflict and the Russia-Ukraine war drove Oil above $100 per barrel during the year.

Citing significant upside risks to inflation, BoJ member Junko Koeda said the central bank should avoid becoming excessively cautious about increasing rates.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

While the BoJ is expected to leave rates on hold in October, 54 of the 78 analysts surveyed forecast an increase in December.

Many BOJ officials would prefer to examine further data on the impact of earlier rate hikes on financial conditions, sources told Reuters.

The survey also found that 39 of 65 analysts, or 60%, anticipate the BoJ raising rates to 1.75% towards the end of June in 2027.

Bank of Japan: Key Questions Answered

What role does the Bank of Japan play?

Responsibility for setting Japan’s monetary policy rests with its central bank, the Bank of Japan (BoJ). The institution is mandated to issue banknotes and manage currency and monetary conditions to maintain price stability, expressed as an inflation target of around 2%.

How has the Bank of Japan’s monetary policy evolved?

Against a backdrop of low inflation, the Bank of Japan adopted an ultra-loose monetary policy in 2013 to support economic activity and lift price growth. Underpinning this approach is Quantitative and Qualitative Easing (QQE), which involves printing banknotes to purchase assets, including government and corporate bonds, and inject liquidity. Further easing followed in 2016 as the bank reinforced its strategy, initially introducing negative interest rates and subsequently taking direct control of the yield on its 10-year government bonds. A rate increase in March 2024 marked the BoJ’s effective retreat from this ultra-loose stance.

How does Bank of Japan policy affect the Japanese Yen?

The Yen weakened against its major currency peers as a result of the Bank’s extensive stimulus programme. Its depreciation intensified in 2022 and 2023 as the policy gap widened between the Bank of Japan and other leading central banks, which raised interest rates sharply to tackle inflation at multi-decade highs. By widening interest-rate differentials with other currencies, the BoJ’s policy weighed on the Yen’s value. The currency partly reversed this trend in 2024 following the BoJ’s decision to move away from its ultra-loose policy stance.

What prompted the Bank of Japan to begin withdrawing its ultra-loose policy?

Japanese inflation moved above the BoJ’s 2% target as a weaker Yen combined with a surge in global energy prices. Expectations of higher salaries in Japan, a key driver of inflation, also helped prompt the policy shift.