CNBC survey: Bank of Japan to hold rates, signal December hike

The Bank of Japan is expected to leave its policy rate unchanged at 1.25% when its two-day meeting concludes on Friday, according to a CNBC survey of 16 economists and analysts. All respondents anticipate the central bank will maintain its current stance following last month's rate increase, which lifted borrowing costs to their highest level in 31 years. Despite the expected pause, the market consensus is firmly oriented toward future tightening, with every participant in the survey expecting the BOJ to prepare the ground for a rate hike in either December or January of next year. This outlook rests on the continued rise in domestic inflation and wages, which macroeconomic data indicates supports further policy normalization. Homin Lee, senior macro strategist at Lombard Odier, noted that while economic factors support additional tightening, the policy board may lack sufficient consensus for successive hikes due to fragility in the domestic bond market.

Inflationary pressures remain a central concern for policymakers. Japan's core inflation, which excludes fresh foods, rose 2.1% from a year earlier in September, marking the highest level of the year. This increase is driven by a weak yen that raises import costs and elevated energy prices, even as government subsidies work to absorb some of these rising costs for consumers. Wage growth has also accelerated, with inflation-adjusted wages rising 1.5% year-on-year in August, the eighth consecutive month of gains according to government data. Satsuki Katayama, Japan's Finance Minister, told lawmakers last week that the country is nearing a phase where rising wages drive persistent inflation, while noting that import costs also push prices up. Sosuke Nakamura, an economist at Citi Research, observed that there are no clear signs of inflation accelerating to a degree that would justify consecutive rate hikes.

Investors are watching for subtle shifts in the BOJ's communication as much as for rate moves. Ryutaro Kimura, senior fixed income strategist at BNP Paribas Asset Management, said he is waiting to see if the bank changes its phrasing in the monetary policy statement from underlying CPI inflation "approaching" 2 percent to having "reached" that threshold. On currency markets, nine respondents expect the yen to trade between 157 and 158 against the U.S. dollar over the next month, with a wider range of 150 to 160 for the three-month outlook. Masahiko Loo, senior fixed income strategist at State Street Investment Management, stated that BOJ normalization and shifting institutional flows should gradually narrow the rate differential and pull capital back toward Japan, though elevated U.S. yields should prevent a straight-line yen rally.

The yield curve is expected to steepen as tightening resumes. Nine respondents forecast that the yield on benchmark 10-year Japanese government bonds will reach between 3% and 3.1% by year-end, up from the current 2.809%. Seven respondents expect the 30-year JGB yield to rise from 3.829% to between 4% and 4.1%. Takuji Aida, chief Japan economist at Credit Agricole, believes the next rate hike is likely in January, coinciding with the BOJ's quarterly outlook report. Thirteen respondents see a terminal rate of 1.75% to 2% by around mid-2027. Masato Koike, senior economist at SOMPO Institute Plus, said he expects the BOJ to stop raising rates at around 1.75% to avoid excessive downward pressure on growth, noting that while data shows the policy rate is closer to the neutral level of 2%, economic conditions warrant caution.