Reuters poll: 86% of economists expect BOJ rate hike by December

A majority of economists expect the Bank of Japan to raise its policy rate to 1.25% by the end of December, with some forecasting a move as early as October, according to a Reuters poll published Thursday. The outlook highlights the central bank's struggle to balance yen-driven inflation against the risks of tightening too quickly amid a fragile economic recovery.

Yen Weakness Fuels Rate Hike Expectations

In the July 13-21 survey, 86% of economists — 75 of 87 — forecast a 25-basis-point hike to 1.25% by year-end, up from 79% in a June poll. Of the 51 respondents who specified a month, 53% chose December and 35% picked October. Nearly all respondents — 95% — expected the BOJ to hold rates steady this quarter at 1%, the three-decade high set in June.WKZO | Everything Kalamazoo | 590 AM · 106.9 FM+2

The yen weakened to 163.24 per dollar on Tuesday in U.S. trading, its lowest level since December 1986. The USD/JPY pair was trading around 163.06 on Wednesday. The currency's slide has intensified speculation about further intervention by Japan's Ministry of Finance, which spent approximately 11.73 trillion yen ($73 billion) defending the currency in April and May without advance warning. Finance Minister Satsuki Katayama said earlier this month that Tokyo remains "ready to respond" and is in regular contact with Washington on foreign exchange issues.TRADING ECONOMICS+5

Inflation Risks and the Rate Gap

"The pace of rate hikes, which until now has been roughly once every six months, may accelerate somewhat due to the need to counter inflationary and yen-selling pressure," said Kazutaka Maeda, senior economist at Meiji Yasuda Research Institute, who expects an October hike.WKZO | Everything Kalamazoo | 590 AM · 106.9 FM

Although Japan's core inflation has remained below the BOJ's 2% target in recent months, the poll's median forecast showed it rising into the mid-2% range by the fourth quarter on higher oil prices following the war in Iran. The BOJ raised rates to 1% from 0.75% in June in a 7-1 vote, with Deputy Governor Shinichi Uchida signaling readiness to tighten further.Reuters+2

Debt Concerns and Political Tensions

Beyond this year, 70% of economists expected rates to reach at least 1.50% by the end of the second quarter of 2027, with a slim majority viewing 1.50% as the BOJ's terminal rate. Nearly 80% of respondents said the dollar/yen rate around 160 was too weak relative to Japan's economic fundamentals.WKZO | Everything Kalamazoo | 590 AM · 106.9 FM

The path forward is complicated by political sensitivities. Prime Minister Sanae Takaichi has signaled wariness of rate rises, and 58% of economists expressed concern about debt-servicing costs over the next two to three years as Japanese government bond yields have climbed to multi-decade highs. A draft government economic blueprint sparked a bond selloff by fueling speculation the government could pressure the BOJ to keep rates low, though it was later revised to reaffirm the central bank's independence.WKZO | Everything Kalamazoo | 590 AM · 106.9 FM