More than one-third of surveyed economists indicate that the Bank of Japan may raise its benchmark interest rate in April, following an expected decision to maintain current policy settings next week. A survey conducted from March 5 to 10 showed that all 51 economists polled anticipate the policy board, led by Governor Kazuo Ueda, will keep borrowing costs unchanged at 0.75% after its two-day meeting concluding next Thursday.
The proportion of economists forecasting a rate hike in April has surged to 37%, up from 17% in the previous survey two months ago. Approximately two-thirds of those predicting an April increase view it as the earliest likely timing for tighter policy. Around 22% of respondents expect a rate hike will not occur until June, while another 29% project July for the next increase. In January's survey, about 48% predicted the central bank would wait until July before raising rates.
Prior to late-month attacks by the United States and Israel on Iran, pricing in the overnight index swap market indicated traders saw nearly a 68% probability of an April rate hike, following a series of hawkish remarks from officials and better-than-expected economic data. Survey results suggest many believe the Bank of Japan will continue with policy normalization as planned, despite ongoing conflicts.
Expansion of the Iran conflict triggered a spike in oil prices early in the week. Although markets have since retreated, supply concerns continue to fuel volatility in energy markets. Many respondents noted that while rising oil prices could weaken economic growth, they may also stimulate inflation expectations, particularly if economic developments align with the central bank’s projections.
Ryutaro Kono, chief Japan economist at BNP Paribas, stated in a survey response, "If the economic outlook does not deteriorate, Governor Ueda will likely reiterate the intention to raise rates at the post-meeting press conference. Provided the Middle East situation stabilizes, the base case is a rate hike in April." Japan imports nearly all of its oil, with over 90% sourced from the Middle East.
Although government officials and analysts continue to assess the impact of regional developments, 53% of respondents indicated that Japan is unlikely to fall into stagflation. About one-quarter found it difficult to judge. Half of the economists believe the Iran conflict increases economic risks, thereby reducing the likelihood of an April rate hike, while 14% think heightened inflation risks make a hike more probable. Another 30% said it is challenging to determine the effect on timing.
Nana Otsuki, senior researcher at Pictet Asset Management Japan, commented, "Although upward pressure on inflation could be a factor accelerating rate hikes, the pace of increases is more likely to be moderated, considering the potential impact on the economy and the government’s emphasis on public sentiment."
Beyond Middle East tensions and inflation trends, the views of Prime Minister Takaichi Sanae are seen as crucial for the Bank of Japan, especially given her historical support for monetary stimulus. Last month, her administration nominated two inflation-focused academics—Toichiro Asada and Ayano Sato—as new members of the central bank’s board. Approximately 80% of economists said these appointments clearly signal the Prime Minister’s preference for a slower pace of rate increases.
Analysts remain divided on whether the new members will slow the pace of tightening within the nine-member policy board: 43% believe they will, while 45% do not. Asada is set to join the board in April, with Sato scheduled to assume her position in June.
Economists also highlighted that if the Prime Minister intervenes in policy discussions to slow monetary normalization, the yen could weaken. More than half of respondents said it would be difficult for the Prime Minister to prevent the Bank of Japan from raising rates, as doing so might lead to yen depreciation. On Wednesday, the yen approached the key 160 level against the U.S. dollar, a threshold that prompted government intervention to support the currency in 2024. A weak yen has exacerbated high inflation in recent years, putting pressure on households.
Tsuyoshi Ueno, chief economist at NLI Research Institute, noted, "The appointments to the policy board suggest the Takaichi administration is not seeking an early rate hike. Therefore, the Bank of Japan is expected to act only after carefully accumulating sufficient evidence to justify an increase. However, if the yen depreciates excessively, a rate hike could occur as early as April."
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