Key facts
- The Bank of Japan is monitoring inflation risks that could prompt quicker interest rate increases.
- A majority of economists expect the BOJ to raise rates by end-December, with many predicting an October hike.
- The current official interest rate in Japan is 1%.
- The yen has weakened significantly, reaching its lowest level against the dollar since December 1986.
- Rising oil prices and U.S. Treasury yields are contributing to inflationary pressures and yen depreciation.
The Bank of Japan is closely monitoring inflation risks that could prompt a faster pace of interest rate hikes than previously anticipated, according to sources familiar with the central bank's thinking and a Reuters poll. A majority of economists surveyed expect the BOJ to raise its key interest rate again by the end of December, with a significant portion predicting an increase as early as October.
The central bank's current official rate stands at 1%. The poll indicates that 86% of economists forecast a 25-basis-point hike to 1.25% by year-end. This potential acceleration is driven by concerns that broadening price pressures, fueled by a weakening yen and rising oil prices, could push inflation above the BOJ's 2% target.
The yen has weakened to 163.24 per dollar, its lowest level since December 1986, exacerbating inflation risks. Some economists believe an earlier rate hike could help curb this inflationary pressure, though others caution that raising rates too quickly could hinder a fragile economic recovery and increase debt-servicing costs for companies and the government.
Beyond this year, 70% of economists expect the policy rate to reach at least 1.50% by the end of the second quarter of 2027, with a slim majority seeing 1.50% as the terminal rate. Despite these potential hikes, nearly three-quarters of respondents believe the BOJ is not moving too slowly, citing the need for inflation to stabilize at 2% and lingering downside risks from geopolitical conflicts.