According to a recent survey, a vast majority of economists following the Bank of Japan (BOJ) expect the central bank to implement another interest rate increase before the end of this year, following its decision this week to raise the benchmark rate to its highest level since 1995. In the survey conducted on Wednesday, 90% of the 44 economists polled forecast that the BOJ will further lift the benchmark rate from its current level of 1% before its December meeting. A quarter of respondents pinpoint December as the timing for the next hike, while 36% believe it will occur in October. When asked separately about the earliest possible timing for the next increase, nearly a quarter of the participants selected September.
Market Expectations for Further Tightening
Observers are predicting the BOJ will act again before December. On Tuesday, the central bank raised borrowing costs for the first time since last December, citing rising risks that underlying inflation could exceed its 2% target. A key question now is whether the BOJ needs to move more swiftly than the widely anticipated pace of action every six months. Marcel Thieliant, Head of Asia-Pacific at Capital Economics, noted in the survey, "With the BOJ now judging that the downside risks to economic activity have diminished while upside risks to inflation have increased, we expect policymakers to accelerate the tightening cycle going forward. We currently expect the BOJ to hike again in October and then deliver another three additional hikes in 2027." If this forecast materializes, the BOJ's overnight call rate would reach 2% by the end of 2027, placing it at the higher end of the survey's prediction range. The median forecast from the survey suggests a rate of 1.5% by end-2027, implying one additional hike in 2026 followed by just one more in 2027. Currently, BOJ watchers expect the terminal rate for this cycle to reach 1.75%, up from a median forecast of 1.5% in a survey earlier this month.
Communication and Policy Signals
Following the meeting, Deputy Governor Shinichi Uchida, who presided over the press conference as Governor Kazuo Ueda was hospitalized last week, did not send clear signals about accelerating the pace of hikes, a point noted by many respondents. Uchida stated, "In the near term, we will closely monitor economic, price, and financial developments, particularly the situation in the Middle East. We will examine whether economic and price developments are in line with our projections and the associated risks. As core inflation approaches 2%, we need to be vigilant about upside price risks. We will flexibly adjust policy to ensure we do not fall behind the curve." After Tuesday's decision, the yen held near 160 per U.S. dollar, as traders remained wary of further intervention by Japanese authorities. Investors may also be waiting for the outcome of the Federal Reserve's meeting before taking action, given market expectations for a shift toward higher borrowing costs in the U.S. The European Central Bank announced a rate hike last week. Naka Matsuzawa, Chief Strategist at Nomura Securities, commented, "With the U.S. and Europe beginning to shift toward rate hikes, the BOJ likely has little choice but to proceed with raising rates faster than previously expected to avoid falling further behind the curve." Speculation about a June hike had been building since a split vote at the BOJ's April meeting, where three board members voted for a hike against holding rates steady. Recently, some policymakers who supported standing pat in April have publicly expressed views favoring a rate increase. Two-thirds of the surveyed economists rated the BOJ's communication ahead of this week's decision as "good" or "very good," while only 5% considered it poor. Chotaro Morita, Chief Strategist at All Nippon Asset Management, said, "Decisions at each future monetary policy meeting are likely to become more significant, rather than simply following a preset path of monetary policy normalization. At the same time, the BOJ will face greater pressure to explain in more detail how it assesses economic and price developments when announcing policy decisions."
The Challenge of Imported Inflation
Despite a recent U.S.-Iran agreement aimed at ending hostilities and reopening the Strait of Hormuz, severe delays in global shipping logistics are keeping supply chains tight, with hundreds of commercial vessels still queuing for safe passage. For Japan, which is heavily reliant on Middle Eastern oil and gas, the price pressures from an energy crisis are imminent. Data shows Japan's wholesale prices surged over 6% year-on-year in May, the fastest pace in three years. Although the overall Consumer Price Index (CPI) for April was 1.4%, temporarily below the BOJ's 2% long-term target, the cost surge at the industrial upstream level has stripped the central bank of any excuse to "maintain policy flexibility." The discrepancy between retail and wholesale prices exposes the underlying weakness in Japan's demand side—businesses are bearing the cost impact of imported energy but struggling to fully pass on the price increases to consumers. This creates an inherent dilemma for rate hike decisions: cost-push inflation triggered by external energy shocks does not necessarily require an interest rate response, and raising rates could further suppress already fragile domestic demand. The BOJ's outlook projects core CPI inflation will gradually rise, reaching levels consistent with the price target between the second half of fiscal 2026 and fiscal 2027, but it also acknowledges that CPI growth could accelerate to levels significantly above 2%. Governor Ueda stated on June 3 that Japan's year-on-year CPI increase is expected to rise substantially, particularly concentrated in fiscal 2026. Whether this "projected acceleration" is sufficient to justify a faster pace of rate hikes is a key question the central bank must address. Furthermore, the BOJ's decision to raise rates is also aimed at stabilizing the yen, which is under pressure from other major currencies like the U.S. dollar and euro. Even with the hike, Japan's interest rates remain low compared to other major economies, such as the U.S. and the U.K., where rates are currently above 3%. While a weak yen enhances the competitiveness of Japanese exports, it also exacerbates imported inflation and puts pressure on government finances, which rely on subsidies to mitigate the impact of rising prices.
Political Constraints on the Rate Path
It is important to note that markets remain concerned about the BOJ's potential for slow action and susceptibility to political pressure. The most subtle, yet critical, constraint on Japanese rate hikes stems from the political sphere. Prime Minister Sanae Takaichi, who continues the policy preferences of "Abenomics," strongly advocates maintaining a loose fiscal and monetary policy environment, arguing that low rates and easy conditions are the only remedy for Japan's economy and explicitly opposes rate hikes. The Takaichi government's expansionary fiscal policy has placed the BOJ in a dilemma: raising rates could trigger a debt crisis, while not raising them could worsen yen depreciation and imported inflation. For the Takaichi government, the immediate priority is to curb excessively rapid rate increases to prevent a surge in government bond yields from fundamentally impacting the government debt ratio, which is near 250%. Several analysts point out that the BOJ must seek a delicate balance between "avoiding angering the Takaichi government" and "preventing acting too slowly" on its policy path. This political pressure is already evident in bond purchase decisions—the most direct effect of pausing the reduction of bond purchases is to suppress a rapid rise in long-term rates, thereby creating a stable environment for debt financing. While hiking rates by 25 basis points, the BOJ announced it would suspend the reduction of its bond purchases starting in April 2027, maintaining monthly Japanese government bond purchases at around ¥2 trillion. This dual approach of hiking while pausing quantitative tightening reflects the central bank's desire to curb inflation and yen weakness without ignoring pressure on the economy, potentially raising market doubts about its policy independence. If the BOJ attempts to accelerate the frequency and magnitude of hikes, resistance from the political arena is likely to intensify. Consequently, the BOJ is likely to adopt a slow pace of hiking every six months—which aligns with the mainstream prediction most economists currently hold for the BOJ's policy rhythm. The BOJ also faces a tricky trade-off: raising rates may help lower inflation, but higher rates also increase borrowing costs, thereby raising expenditures for both the government and corporations. Japanese economist Jesper Koll stated, "After two decades of deflation, Japan is now in a rising inflation cycle. Emergency/crisis management monetary policy is no longer needed; the BOJ wants to return to normal monetary policy."
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