Bank of Japan (BOJ) Governor Kazuo Ueda speaks at a conference hosted by the Bank of Japan Institute of Monetary Affairs in Tokyo, Tuesday, May 27, 2025.
Kiyoshi Ota | Bloomberg | Getty Images
The Bank of Japan is expected to keep interest rates unchanged at 1.25% at the end of its two-day meeting on Friday, with a rate hike in the coming months highly likely, according to a CNBC survey.
All 16 respondents expect the Bank of Japan to be patient, given that it raised interest rates to a 31-year high last month. All respondents said they expected the Bank of Japan to be ready to raise interest rates in December or January next year, as domestic inflation and wages continue to rise.
Homing Li, senior macro strategist at Lombard Odier, said macroeconomic factors support further policy tightening by the Bank of Japan. “However, given the fragility of the domestic bond market, there is a possibility that the Governing Council will not be able to reach sufficient consensus for successive interest rate hikes.”
Sousuke Nakamura, an economist at Citi Research, said there were no clear signs that inflation would accelerate enough to justify successive rate hikes.
Japan’s core inflation rate excluding fresh food rose 2.1% in September from a year earlier, the highest this year as a weaker yen raised import costs and higher energy costs led to higher prices, even as government subsidies absorbed higher energy costs for consumers.
According to the latest government statistics, Japan’s inflation-adjusted wages rose for the eighth straight month in August, rising 1.5% from a year earlier, suggesting the possibility of inflation due to higher wages.
Finance Minister Satsuki Katayama reportedly told parliament members last week that Japan was “moving into a period of sustained inflation driven by rising wages,” acknowledging that rising import costs were also pushing up prices.
According to reports from Reuters and the Japan Times, the Bank of Japan is expected to declare that its 2% “underlying inflation” target has been achieved at this meeting.
Yen and yield
Ryutaro Kimura, senior fixed income strategist at BNP Paribas Asset Management, said he was waiting to see whether the Bank of Japan changed its wording about inflation in this week’s monetary policy statement from “underlying CPI inflation is approaching 2%” to “reaching 2%.”
Regarding the yen, nine respondents expect it to trade between $157 and $158 against the dollar over the next month. Respondents’ expectations for the three-month yen target varied further, ranging from 150 to 160 yen.
“With the Bank of Japan’s normalization, rising domestic yields, and changes in institutional capital flows, interest rate spreads will gradually narrow and capital will be drawn back to Japan,” said Masahiko Lu, senior fixed income strategist at State Street Investment Management. But, he added, “if US yields rise, a linear appreciation in the yen will be arrested.”
Last week, the yen strengthened against the dollar, and safe-haven demand pushed yields on Japanese government bonds lower on the back of a decline in AI stocks. This is a reversal from earlier in the month, when Prime Minister Sanae Takaichi’s spending plans and a global bond slide weighed on assets.
Nine respondents said they expected the yield on the benchmark 10-year Treasury note to be between 3% and 3.1% by the end of the year, up from the current 2.809%. Seven respondents said they expected the 30-year Treasury yield to rise to 4-4.1% from 3.829% on Tuesday.
The forecast comes as analysts expect the Bank of Japan to resume tightening after an expected pause in October.
Takuji Aida, chief Japan economist at Credit Agricole, said the next rate hike is likely to occur in January, when the Bank of Japan is scheduled to release its quarterly outlook report assessing economic activity and prices.
Thirteen respondents said they expected the terminal interest rate, the level at which the Bank of Japan is expected to end its tightening cycle, to be between 1.75% and 2% by around mid-2027.
Masato Koike, senior economist at Sompo Institute Plus, said macroeconomic data showed the policy rate was moving closer to the Bank of Japan’s neutral inflation target of 2%. However, “given the state of the Japanese economy and the need to avoid excessive downward pressure on growth, we expect the Bank of Japan to halt interest rate hikes at around 1.75%,” Koike said.
The CNBC survey was conducted between October 14th and 26th among 16 economists and analysts.
—CNBC’s Lim Hui Jie and Sri Jegarajah contributed to this report.
