Survey shows: Over 80% of economists expect the Bank of Japan to raise interest rates in December, with consensus that it will hold steady in October

According to Golden Ten Data, a survey shows that over 80% of Bank of Japan watchers expect the next rate hike to come in December. No one anticipates that the Bank of Japan will take action at the meeting ending on October 30.

Specifically, 83% of economists expect the Bank of Japan to raise borrowing costs from the current 1.25% at the meeting ending on December 18. Just a month ago, only 35% predicted a December rate hike, with January next year being the most popular timing for a hike back then. The latest survey also shows that 67% of respondents expect the Bank of Japan to hike rates every three months, up from 46% in the previous survey. This indicates that after the September rate hike (which was the second time in three months and the fastest pace since 1990), the market expects the Bank of Japan to maintain the same rate hike rhythm.

Many economists say the biggest focus of the October meeting is the Bank of Japan's assessment of whether underlying inflation has already reached the 2% target. Since setting the price stability goal in 2013, the Bank of Japan has yet to announce the achievement of this target. Keiji Kanda, Chief Economist of Daiwa Institute of Research, wrote in the survey: “If achievement is confirmed, the future challenge will be to adjust the degree of monetary easing while firmly anchoring 2% inflation expectations.” He expects rate hikes in December and next March.

About a month ago, the Bank of Japan raised borrowing costs to 1.25%, entering its estimated neutral rate range of 1.1% to 2.5% for the first time. This has sparked greater market focus on the terminal rate of the rate hike cycle. In the latest survey, the median terminal rate forecast remains at 1.75%. Some economists point out that the Sanae Takaichi administration may pose an obstacle to the Bank of Japan’s rate hike path.

Sanae Takaichi supports an easy monetary policy to stimulate economic growth, but US Treasury Secretary Bessent recently urged Japan to drop its reflation policy. Subsequently, Sanae Takaichi and her cabinet ministers repeatedly stated they are not pursuing reflation. Based on these statements, about two-thirds of economists assess that the Takaichi government's stance on the Bank of Japan’s rate hikes has softened.

Naomi Muguruma, Chief Bond Strategist at Mitsubishi UFJ Morgan Stanley Securities, said: “The Prime Minister's office may not really welcome further rate hikes by the Bank of Japan. But for now, it seems more likely to stand by and tacitly approve the hike, mainly out of consideration for relations with the US.”

When the Bank of Japan raised rates in September, it faced two dissenting votes from committee members Toichiro Asada and Ayano Sato, both appointed by Sanae Takaichi. This division led to a weaker yen and made the Bank of Japan committee's vote results a focus for the market. Meanwhile, Yoshimasa Maruyama, Chief Market Economist at SMBC Nikko Securities, believes that hawkish member Hajime Takata may call for consecutive rate hikes at this meeting.

The survey shows that regarding the quarterly economic outlook report released alongside the October policy statement, observers expect the Bank of Japan's inflation outlook to remain largely unchanged, with only a slight upward revision for the next fiscal year. Takeshi Yamaguchi, Chief Economist at Morgan Stanley MUFG Securities, said: “The Bank of Japan may state that it believes underlying inflation has reached around 2%. We expect the Bank of Japan to keep policy unchanged this month, but it could be a hawkish pause.”