Market observers are increasingly predicting that the Bank of Japan will raise interest rates twice this year, with the first move expected as early as next week. This shift in expectations is driven by growing concerns that geopolitical tensions could lead to sustained inflationary pressures.
A recent survey of 51 economists revealed that approximately 49 of them anticipate the central bank's policy board will increase its key interest rate by 25 basis points to 1% at the conclusion of its two-day meeting on June 16. This would mark the highest level for the rate since 1995. The poll further indicated that respondents expect the rate to climb to 1.25% by the end of the year, implying an additional hike is on the horizon.
Global Monetary Policy Shift
This survey comes amid a backdrop of elevated international oil prices, which is prompting monetary authorities worldwide to adopt a more hawkish stance. The European Central Bank is widely anticipated to implement its first interest rate increase since 2023 later this week. Meanwhile, several officials from the U.S. Federal Reserve have recently signaled a shift in their outlook, suggesting the possibility of a rate hike before the year concludes.
Central Bank Signals
Expectations for a Japanese rate hike intensified following recent comments from Bank of Japan Governor Kazuo Ueda. He indicated that his primary concern lies with upside risks to prices, rather than the potential economic shocks stemming from instability in the Middle East. According to 94% of the survey respondents, Governor Ueda's remarks have made a June rate hike either a certainty or a highly probable outcome.
Naomi Muguruma, Chief Bond Strategist at Mitsubishi UFJ Morgan Stanley Securities, noted in the survey, "The focal point of this meeting will be how far Governor Ueda goes in discussing the possibility and necessity of accelerating the pace of rate hikes—in other words, whether he will signal a transformation into an 'inflation fighter.'"
Risks of Falling Behind
The proportion of respondents who believe the Bank of Japan faces a rising risk of "falling behind the curve" in its fight against inflation has reached 60%. This is the highest level recorded since the survey began posing this question last July.
Kazuhiko Sano, Chief Bond Strategist at Tokai Tokyo Securities, stated, "If the Bank of Japan does not raise rates, concerns about its delayed action could intensify, potentially triggering a sharp spike in long-term interest rates."
Economic Resilience
Despite geopolitical pressures, the Japanese economy has demonstrated relative resilience. Revised GDP data released on Monday showed the economy expanded at an annualized rate of 1.8% in the first quarter of this year, marking the second consecutive quarter of growth.
Amid this economic backdrop, sources indicate that policymakers are set to deliberate on raising the benchmark rate by 25 basis points next week, while keeping the option of a further increase later in the year open. The survey shows about 71% of economists expect the central bank to raise rates approximately every six months. Economists, including Yoshimasa Maruyama of SMBC Nikko Securities, anticipate the next hike could occur in October.
Political Considerations
The stance of Japanese Prime Minister Fumio Kishida is seen as complicating the central bank's efforts to normalize monetary policy, given his past public support for monetary easing. Roughly 75% of respondents indicated that if the Bank of Japan skips a rate hike this month, it would reinforce the market's perception that the Prime Minister has set a high bar for tightening.
Bond Purchase Plans
Another key focus of the upcoming meeting will be the Bank of Japan's updated plan for monthly bond purchases starting from the fiscal year beginning April 2027. Under the current plan, the pace of purchases is set to decline to around 2.1 trillion yen per month by that time. A strong majority of analysts forecast the bank will slow the pace of its monthly reduction in bond buying.
However, economists are divided on whether policymakers will "halt the reduction" or "continue at a slower pace." Approximately 44% believe the bank will stop reducing its purchases, while 36% expect it to merely slow the pace of reduction. Another 18% anticipate it will maintain the current quarterly reduction of 200 billion yen.
According to 52% of economists, the debate over reducing bond purchases has become more complex due to concerns that doing so might create an impression the central bank is attempting to assist the Kishida administration, which has pledged responsible yet proactive fiscal spending.
Naoya Hasegawa, Chief Bond Strategist at Okasan Securities, commented, "I expect the Bank of Japan to pause the reduction of its bond purchases. However, given concerns that such a move could be seen as yielding to political pressure and might lead to yen weakness or higher long-term yields, the bank may opt to slow the pace of quantitative tightening rather than stopping it entirely."
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