The Bank of Japan is widely expected to maintain its current policy rate this week after a recent hike, yet a CNBC survey reveals a strong consensus among economists for an imminent rate increase in December or January. This “hawkish pause” comes as domestic inflation and wage growth continue to climb, pushing the central bank closer to declaring its 2% underlying inflation target met. Meanwhile, experts anticipate continued volatility for the Japanese Yen, with varying forecasts for its near-term performance against the U.S. dollar.
Despite a significant rate hike last month, pushing borrowing costs to a 31-year high, the Bank of Japan (BOJ) is widely expected to hold its policy rate steady at 1.25% following its two-day meeting concluding Friday. This consensus comes from a recent CNBC survey, which polled 16 leading economists and analysts. While a pause is anticipated for now, all respondents foresee the central bank setting the stage for another rate increase either in December or January of next year, signaling a 'hawkish pause' amidst persistent inflationary pressures.
Kazuo Ueda, governor of the Bank of Japan (BOJ), speaks during a conference hosted by the bank's Institute for Monetary and Economic Studies in Tokyo, Japan, on Tuesday, May 27, 2025.
The central bank's cautious approach is influenced by a combination of factors. Homin Lee, a senior macro strategist at Lombard Odier, notes that while macroeconomic fundamentals support further policy tightening, the delicate state of the domestic bond market might hinder successive rate hikes. Similarly, Sosuke Nakamura, an economist at Citi Research, suggests a lack of clear signals for inflation accelerating enough to justify continuous increases.
However, inflationary pressures remain significant. Japan's core inflation, excluding fresh foods, climbed to 2.1% in September, marking its highest level this year. This surge is primarily driven by a depreciating yen, which escalates import costs, and sustained high energy prices. Moreover, inflation-adjusted wages have recorded an eighth consecutive monthly increase in August, rising by 1.5% year-over-year, hinting at a shift towards wage-driven inflation. Finance Minister Satsuki Katayama recently informed lawmakers that Japan is on the 'cusp of shifting to a period of sustained inflation driven by rising wages.'
Crucially, the BOJ is reportedly expected to declare that its 'underlying inflation' target of 2% has been met during this very meeting, a significant milestone that could pave the way for future policy adjustments.
Yen and Yields Under Scrutiny
Market participants are keenly watching for any linguistic changes in the BOJ's monetary policy statement, particularly whether it revises its inflation phrasing from 'underlying CPI inflation has been approaching 2 percent' to 'has reached 2 percent,' as highlighted by Ryutaro Kimura, senior fixed income strategist at BNP Paribas Asset Management.
The outlook for the Japanese Yen remains varied, with nine respondents in the CNBC survey predicting it to trade between 157 and 158 against the U.S. dollar over the next month. Longer-term, the three-month forecasts are more dispersed, ranging from 150 to 160. Masahiko Loo, senior fixed income strategist at State Street Investment Management, anticipates that BOJ normalization, higher domestic yields, and shifting institutional flows should gradually narrow the rate differential and draw capital back towards Japan, but also cautions that elevated U.S. yields will likely prevent a swift yen rally.
Japanese government bond (JGB) yields are also projected to climb. Nine respondents expect the benchmark 10-year JGBs to reach between 3% and 3.1% by year-end, up from the current 2.809%. Similarly, seven respondents foresee the 30-year JGB yield rising to 4% to 4.1% from 3.829%. These forecasts are consistent with expectations of renewed BOJ tightening after the anticipated October pause.
Credit Agricole's chief Japan economist, Takuji Aida, suggests the next rate hike is most likely to occur in January, aligning with the BOJ's release of its quarterly outlook report. Looking further ahead, thirteen respondents believe the terminal rate, where the BOJ's tightening cycle concludes, will settle between 1.75% and 2% by mid-2027. Masato Koike, senior economist at SOMPO Institute Plus, indicates that while the policy rate is nearing the neutral level of 2%, the BOJ might cap hikes at around 1.75% to mitigate excessive downward pressure on economic growth.
The CNBC survey was conducted between October 14 and 26, gathering insights from 16 leading economists and analysts.
