The Bank of Japan is expected to keep the policy rate unchanged at 1.25% at the end of its two-day meeting on Friday, according to a CNBC survey, with the possibility of a hike very much alive in the coming months.
All 16 respondents expect the BOJ to stand pat, given the bank raised rates last month to their highest level in 31 years. All respondents said they expect the BOJ to set the stage for a rate hike in December or January next year, as domestic inflation and wages continue to rise.
Macroeconomic factors support the BOJ's additional policy tightening, said Homin Lee, senior macro strategist at Lombard Odier. "But there may not be sufficient consensus in the policy board for successive rate hikes given the fragility in the domestic bond market," he added.
Sosuke Nakamura, an economist at Citi Research, said he sees no clear signs of inflation accelerating to a degree that would justify consecutive rate hikes.
Japan's core inflation, excluding fresh foods, for September rose 2.1% from a year earlier, reaching its highest this year as a weak yen raises import costs and elevated energy costs feed through to higher prices, even as government subsidies absorb rising costs of energy for consumers.
Japan's inflation-adjusted wages rose for the eighth month in a row in August, climbing 1.5% from a year earlier, according to the most recent government data, signaling potential wage-growth-driven inflation as well.
Finance Minister Satsuki Katayama reportedly told lawmakers last week that Japan was "on the cusp of shifting to a period of sustained inflation driven by rising wages," while acknowledging that higher import costs were also pushing up prices.
Yen and yields
Ryutaro Kimura, senior fixed income strategist at BNP Paribas Asset Management, said he was waiting to see if the BOJ changes its phrasing about inflation in the monetary policy statement this week from "underlying CPI inflation has been approaching 2 percent" to it "has reached 2 percent."
As for the yen, nine respondents expect it to trade between 157 and 158 against the greenback over the next one month. Respondents' outlook for the three-month yen target was more scattered, ranging from 150 to 160.
"BOJ normalization, higher domestic yields and shifting institutional flows should gradually narrow the rate differential and pull capital back toward Japan," said Masahiko Loo, senior fixed income strategist at State Street Investment Management. But he added, "Elevated U.S. yields should prevent a straight-line yen rally."
The yen strengthened against the dollar, and Japanese government bond yields fell last week due to safe-haven demand amid a sell-off in AI stocks — a reversal from earlier in the month, when Prime Minister Sanae Takaichi's spending plans and a global bond sell-off pressured those assets.
Nine respondents said they expect the yield on the benchmark 10-year JGBs to be between 3% and 3.1% by the end of the year, up from the current 2.809%. Seven respondents said they expect the yield on the 30-year JGB to rise to 4% to 4.1% from 3.829% as of Tuesday.
That forecast comes as analysts expect the BOJ will resume tightening after an anticipated pause in October.
Takuji Aida, chief Japan economist at Credit Agricole, said the next rate hike is likely to happen in January, when the BOJ is scheduled to release its quarterly outlook report that assesses economic activity and prices.
Thirteen respondents said they expect a terminal rate, or the level at which the BOJ is expected to stop its tightening cycle, of 1.75% to 2% by around mid-2027.
Macroeconomic data shows the policy rate is closer to the neutral level of 2%, the BOJ's inflation target, said Masato Koike, senior economist at SOMPO Institute Plus. But "given the state of the Japanese economy and the need to avoid excessive downward pressure on growth, I expect the BOJ to stop raising rates at around 1.75%," Koike said.
The CNBC survey was conducted from Oct. 14 to 26 among 16 economists and analysts.
— CNBC's Lim Hui Jie and Sri Jegarajah contributed to this report.