The Bank of Japan finds itself at a critical juncture for monetary policy. While markets anticipate the central bank may be compelled to press the accelerator on rate hikes as early as autumn, half of surveyed economists still believe it will not act until December.
A Bloomberg survey indicates that following the central bank's rate increase last month, approximately 50% of the 52 economists polled see December as the most likely timing for the next benchmark rate hike. Another 40% of respondents expect the subsequent hike to occur in October.
The overwhelming majority of economists still believe the Bank of Japan will maintain a gradual normalization pace. About 82% of those surveyed anticipate the bank will raise rates roughly every six months, an increase from the 71% figure in the June survey.
Market participants display significantly greater confidence in earlier action from the Bank of Japan. As of Thursday, market-implied probability for a rate hike by the end of October has reached 83%.
A report published after the survey further reinforced expectations for an earlier hike. Informed sources revealed that the weak yen is heightening inflation upside risks, and the Bank of Japan's policy board is willing to consider raising interest rates at a faster pace than the consensus among economists.
Markets widely expect the Bank of Japan to hold its policy rate steady at 1% next week to assess the impact of the previous hike. The quarterly economic outlook report released during the meeting will be a major focus for investors.
The median forecast from economists suggests the central bank may slightly lower its inflation forecast for this year from 2.8% to 2.6%, while simultaneously raising its economic growth forecast to 0.7%.
High Government Influence Still Seen as a Normalization Hurdle
Prime Minister Sanae Takaichi has consistently supported accommodative monetary policy. In the survey, 59% of economists believe government influence will act as an obstacle for the Bank of Japan's policy board in advancing its normalization efforts.
The Japanese government earlier this week published its annual economic policy guidelines, adding a commitment to respect the Bank of Japan's independence. The government aims to downplay perceptions that it is attempting to influence the central bank.
An earlier draft of the guidelines had sparked concerns that policy normalization could be delayed, briefly pushing the benchmark 10-year Japanese government bond yield to its highest level in three decades.
Following the guideline revisions, many economists have not altered their assessment. Approximately two-thirds of respondents do not believe this signifies the government will cease attempts to intervene in the central bank's independence.
Tsuyoshi Ueno, Chief Economist at NLI Research Institute, stated, "The hurdle for another rate hike ahead of schedule is high due to the divergence between the Bank of Japan and the government on the pace of increases."
When the Bank of Japan raised borrowing costs to 1% on June 16th, the government did not issue a clear signal of opposition to the decision. About 65% of Bank of Japan watchers believe the persistent depreciation of the yen forced Prime Minister Takaichi to accept this rate hike.
Earlier this week, renewed escalation in US-Iran tensions pushed oil prices higher, with the yen weakening past 163 against the US dollar for the first time since 1986. With Japan relying on imports for nearly all its energy and over half its food, a weaker yen further intensifies inflationary pressures.
With the oil price outlook remaining uncertain and the yen continuing to depreciate, economists have not completely ruled out an earlier rate hike. About 37% of respondents believe policy could be adjusted as early as September, up from 23% in the post-June meeting survey.
Kento Minami, an economist at Daiwa Securities, said, "Inflation upside risks remain high, and yen depreciation is intensifying price pressures."
"The Bank of Japan is shifting the focus of its rate decisions towards managing inflation upside risks, making the timing of the next hike increasingly likely to be earlier than previously expected," Minami added.
US-Japan Rate Differential Amplifies Yen Pressure
Eugene Leow, Senior Rates Strategist at DBS Group Research, noted that with media reports suggesting the Bank of Japan is open to accelerating rate hikes, investors are likely to pay closer attention to the short-term interest rate differential between the US and Japan.
Since early 2026, the gap between one-year dollar rates and one-year yen rates has continued to widen. Investors have shifted their expectations for the Federal Reserve from rate cuts to hikes, while the pace of adjustment in Japanese interest rates has been far more moderate.
Leow stated, "Assuming the Fed's hawkish stance persists for some time, investors may need to see the Bank of Japan willing to accelerate its hiking pace to 25 basis points per quarter to narrow the widening rate gap with the US."
Yusuke Matsuo, an economist at Mizuho Securities, expects Bank of Japan Governor Kazuo Ueda to reiterate the stance for further rate hikes at next week's press conference, but such remarks are unlikely to reverse the yen's weak trend.
"Markets have largely priced in expectations for a Bank of Japan rate hike every six months, so statements alone are unlikely to significantly boost the yen," Matsuo said. "Given market expectations for the central bank to clarify the timing and magnitude of the next hike, any stance interpreted as dovish could exacerbate yen weakness in the broader environment of US dollar strength."
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