Economists Anticipate BOJ Rate Hike in Q4 Amidst Global Uncertainties

BOJ Rate Hike Expected in Q4 Amidst Global Economic Crosscurrents

A Reuters poll indicates that a majority of economists expect the Bank of Japan (BOJ) to raise its key interest rates by at least 25 basis points in the October-December period, or the fourth quarter (Q4). However, this proportion has slightly decreased from nearly two-thirds of economists who predicted this in the previous month's survey.

In the survey conducted from September 2-9, 93% of analysts who answered an additional question indicated that interest rate cuts by the Federal Reserve would not delay the BOJ's pursuit of a slightly tighter monetary policy.

All but three of the 68 economists surveyed predicted that the BOJ would not change interest rates at its upcoming September 18-19 policy meeting, which precedes the Federal Reserve's meeting on September 16-17.

However, 55% of 66 (or 36 economists) anticipated that the central bank would raise borrowing costs from 0.50% to at least 0.75% in the following quarter. This is down from 63% in the previous month's survey, but in line with 54% in July.

Atsushi Takeda, chief economist at the Itochu Economic Research Institute, stated, "Given the accelerating depreciation of the yen and the risk of an asset bubble, the BOJ may want to adjust its current monetary easing stance. If the impact of Trump's tariffs becomes clear from trade data and the 'Tankan' survey, then a rate hike in October would become feasible."

Yusuke Matsuo, senior market economist at Mizuho Securities, added that if the 'Tankan' survey and branch managers' meetings showed that wages and inflation would gradually rise even under the impact of US tariffs, the BOJ might also raise interest rates in October.

The median forecast for the BOJ's year-end interest rate was 0.75%, the same as in the previous month's survey. Financial markets are pricing in a greater than 50% chance of the central bank raising interest rates before the end of the year.

BOJ Deputy Governor Ryozo Himino stated last week that the bank should continue to raise interest rates but cautioned that global economic uncertainty remains high, signaling that it is in no rush to raise still-low borrowing costs.

Furthermore, the central bank might delay raising interest rates depending on who succeeds outgoing Prime Minister Shigeru Ishiba.

Masato Koike, senior economist at Sompo Institute Plus, said, "If Sanae Takaichi, a fiscal dove, becomes the next prime minister, the possibility of further rate hikes will be significantly reduced."

Answering an additional question, over three-quarters of the 29 economists (22 people) said they did not expect wage growth in next year's labor negotiations to exceed this year's 5.25%. The median forecast from the 26 economists who commented on this was 4.80%. Masamichi Adachi, an economist at UBS, said:

"The global and US economic deterioration caused by US tariff policies is expected to put pressure on Japanese corporate profits and the economic outlook. Nevertheless, the growth rate is expected to remain around 5%, which will lead the BOJ to conclude that the 'virtuous cycle' of wages and prices is continuing."

Analyzing the Economic Context

It's crucial to understand the factors influencing the BOJ's decisions. While raising interest rates aims to curb inflation and support the yen, it must be done cautiously to avoid hindering economic growth. The challenge for the BOJ is balancing these competing objectives in an uncertain global economic environment.

Trade data and the 'Tankan' survey are key indicators the BOJ will closely monitor to assess the impact of US tariffs on the Japanese economy. If these indicators show the economy remains resilient, the BOJ is more likely to raise interest rates in October.

Factors Influencing Monetary Policy

• Global Economic Uncertainty: The BOJ needs to consider potential disruptions caused by international trade tensions and economic slowdowns.
• Inflation Targets: The BOJ's long-standing goal is to achieve a stable 2% inflation rate.
• Wage Growth: Sustained wage growth is seen as a key factor in achieving the BOJ's inflation target.
• Political Landscape: The new Prime Minister's economic policies could significantly impact the BOJ's approach.