BoJ Holds Rates, Eyes December Hike

The Bank of Japan will likely keep its policy rate at 1.25% when its two-day meeting concludes on Friday, according to a CNBC survey of 16 economists and analysts. This decision follows last month's rate increase, which marked the highest level in 31 years. While the immediate hold is expected, the consensus view is that the central bank is positioning itself for another hike in December or January of next year.

The move reflects a hawkish stance driven by persistent domestic inflation and rising wages. September core inflation, which excludes fresh foods, climbed to 2.1% from a year earlier. This figure represented the highest point of the year, fueled by a weak yen that raises import costs and elevated energy prices. Although government subsidies are helping absorb some consumer costs, the underlying pressure on prices remains high. Additionally, real wages rose for the eighth consecutive month in August, increasing 1.5% year over year.

Finance Minister Satsuki Katayama told lawmakers last week that Japan is on the verge of entering a period of sustained inflation driven by wage growth. She acknowledged that higher import costs are also contributing to price increases. At the upcoming meeting, the Bank of Japan is expected to formally declare that its 2% underlying inflation target has been met. Ryutaro Kimura, a senior fixed income strategist at BNP Paribas Asset Management, noted that analysts are watching for a shift in the central bank's language from saying inflation has been "approaching" the target to saying it "has reached" it.

Opinions differ on the pace of future tightening. Homin Lee, a senior macro strategist at Lombard Odier, stated that macroeconomic factors support further policy tightening. However, he cautioned that the policy board may lack consensus for successive hikes due to the fragility of the domestic bond market. Sosuke Nakamura, an economist at Citi Research, argued there are no clear signs that inflation is accelerating enough to justify consecutive rate hikes immediately. Takuji Aida, chief Japan economist at Credit Agricole, predicted the next hike will likely occur in January, coinciding with the release of the central bank's quarterly outlook report.

The survey also provided forecasts for Japanese government bond yields and the currency. Nine respondents expect the 10-year JGB yield to reach between 3% and 3.1% by the end of the year, up from 2.809%. Seven expect the 30-year yield to rise to 4% or 4.1% from 3.829%. Regarding the yen, nine analysts forecast a trade range of 157 to 158 against the dollar over the next month. Masahiko Loo of State Street Investment Management said that while BOJ normalization should pull capital back to Japan, elevated U.S. yields will prevent a straight-line rally in the yen. Thirteen respondents anticipate the terminal rate for the current tightening cycle will settle between 1.75% and 2% by mid-2027.