Hawkish expectations rise! Most economists predict the Bank of Japan will raise interest rates ahead of schedule.

Market expectations for the Bank of Japan’s rate hike are significantly moving forward. On February 19, according to Bloomberg, Junichi Hanzawa, president of the Japanese Bankers Association, stated at a routine press conference in Tokyo that the central bank could begin raising interest rates as early as March or April, with the exact timing depending on the evolution of economic and price outlooks.

This statement further reinforced the hawkish outlook in the market. According to the latest Reuters survey, most economists expect the BOJ to raise the policy rate to 1% by the end of June, a timeline moved up noticeably compared to previous forecasts before the ruling party’s significant victory in the House of Representatives elections. The market consensus for the next rate hike has moved up from September to the first half of the year. In December last year, the BOJ raised rates to 0.75%, the highest in 30 years, and clearly indicated its readiness to continue the rate hiking process.

Recent research by Morgan Stanley with U.S. investors also confirms this hawkish shift. Some investors have begun pricing in the possibility that the rate hike could be further advanced to April, with even the possibility of action at the March meeting not ruled out. Analysis points out that the joint foreign exchange inspection between Japan and the U.S. in January, and the meeting scheduled for March, could create external policy coordination pressures, prompting the BOJ to take early action in March. According to Daily Economic News, on February 9, Japan’s Prime Minister Sanae Takaichi announced at a press conference that she would visit the U.S. in March to meet President Trump, declaring a new chapter for the Japan-U.S. alliance.

Data Lag: BOJ’s April Meeting Faces “Blind Flight”

Despite ongoing market disagreements over the exact rate hike timing, the January meeting minutes have revealed that internal divergences are converging. Some policy committee members, while supporting the hike, also pointed out that aside from food and dining out, the transmission of labor costs to core CPI remains limited by insufficient household consumption capacity, and the future inflation trend still needs data verification.

Notably, key inflation data will be released significantly after the policy meetings: April’s national CPI and Tokyo CPI will be published on May 22 and May 1 respectively, meaning the BOJ’s April meeting will decide in the absence of core data.

Against this backdrop, Morgan Stanley recommends investors watch for implied signals from the Tankan Survey and branch manager meetings as supplementary indicators. Meanwhile, the market is highly sensitive to recent BOJ committee remarks, and the speeches of Vice Governors Himino (March 2) and Koeda (February 24) will be key windows into policy direction and could provide critical guidance for market expectations during the data vacuum period.

Meanwhile, the market is closely watching whether Sanae Takaichi will again urge the BOJ to keep rates low, as her policy stance may exert potential pressure on monetary authorities. Analysts believe that political willingness to intervene in rate trends may become an external variable influencing the pace of the BOJ’s decisions.

Fiscal Policy Narrative Shift

Investors are forming a new cognitive framework regarding the Takaichi government’s fiscal stance.

Morgan Stanley’s recent research shows that although the specific framework and timing for the consumption tax cut, including whether to adopt a two-year temporary measure, remains uncertain, the market narrative has clearly shifted: From concerns about excessive fiscal expansion to gradually assessing that fiscal easing will be selectively implemented.

This view aligns with Morgan Stanley’s assessment of Japan’s fundamentally sound fiscal situation. However, given the important holdings by overseas investors in the super long-term Japanese government bond market, market focus on fiscal sustainability will not abate.

The recent focus is on the latest progress of the Consumption Tax Cut National Committee. The market is closely evaluating the direction of the committee’s discussions and its potential impact on the fiscal management framework, while carefully considering the practical feasibility of implementing relevant policies.

Economic Upside Expectations Rising

Against the backdrop of the ruling party’s consolidated political foundation, market attention to Japan’s economic upside is extending from pure anti-inflation logic to the fields of safety and strategic investments.

Morgan Stanley’s research shows that aside from price movements, investors are deeply interested in the industrial impact of national security-related policies. The general expectation is that security-related fiscal budgets will continue to expand, focusing on two main areas: first, crisis management and strategic investment covering economic security, food, energy, resources, healthcare, and national resilience; second, artificial intelligence, semiconductors, shipbuilding, aerospace, and 17 other key strategic sectors.

It is worth noting that regarding the previously announced $550 billion investment plan in the U.S., some investors expect specific project details may gradually be disclosed after the March Japan-U.S. meeting. Meanwhile, the market's attention to the newly discussed national defense spending goals is heating up, especially regarding the details of funding for non-core defense expenditure items (such as infrastructure).

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