Key facts
- A majority of economists surveyed by Reuters expect the Bank of Japan to raise interest rates in September.
- The key interest rate is expected to reach 1.25% in September.
- The terminal rate is projected to be higher than previously anticipated.
- Japan and the U.S. conducted a rare joint yen-buying intervention last month.
- Most economists believe the intervention was ineffective in the long term.
- Prime Minister Sanae Takaichi's fiscal policy is expected by most economists to weaken the yen.
The Bank of Japan is poised to accelerate its monetary tightening, with a majority of economists in a Reuters poll anticipating a key interest rate hike to 1.25% in September. This marks a significant shift from previous expectations, driven by concerns over persistent inflation and the weakening yen, despite a rare joint currency intervention by Japan and the U.S.
The August 17-24 survey revealed that 57% of economists expect a rate hike next month, a sharp increase from just 5% in the July poll. A minority anticipate further hikes to 1.5% by October or December.
Ayako Fujita, chief Japan economist at JPMorgan Securities, noted that a September hike has become unavoidable to avoid market destabilization, as the market has largely priced it in.
The central bank had previously raised rates to a three-decade high of 1% in June.
Looking beyond this year, nearly two-thirds of analysts predict the policy rate will reach at least 1.5% by the end of March 2025, three months earlier than previously forecast. Approximately 60% expect the rate to hit at least 1.75% by the end of the third quarter of 2027.
Regarding the terminal rate, half of the respondents suggested 1.75%, an increase from 19% in July, while the share expecting 2% or higher rose to 36% from 23%.
The effectiveness of the recent yen-buying intervention by Japan and the U.S. was questioned, with over two-thirds of respondents deeming it "not very effective" or "not effective at all." Many believe it only delayed underlying issues.
Furthermore, 89% of economists indicated that Prime Minister Sanae Takaichi's fiscal policy would contribute to yen weakness. Concerns linger over the funding of planned tax cuts and investment spending. Kyohei Morita, chief economist at Nomura Securities, stated that the administration's fiscal policy raises inflation expectations and intensifies concerns that the BOJ is falling behind the curve. He added that a consumption tax cut, if implemented without clear funding, could accelerate yen depreciation, potentially leading overseas investors to sell Japanese government bonds.