Rate hike expectations move forward! 90% of economists predict the Bank of Japan will raise interest rates again this year.

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After the Bank of Japan raised interest rates to their highest level since 1995 this week, expectations in the market for further tightening of monetary policy have quickly intensified. According to a Bloomberg survey, the vast majority of economists expect the Bank of Japan to raise interest rates again within this year, with some analysts even forecasting an accelerated pace of tightening.

Bloomberg reported on Thursday that a survey of 44 economists showed about 90% of respondents expect the Bank of Japan to further raise the benchmark interest rate from 1% before the December meeting. Among them, 52% believe a rate hike is most likely in December, 36% point to October, and nearly a quarter think action could be taken as early as September.

The Bank of Japan announced an interest rate hike on Tuesday, its first since last December, citing the risk that underlying inflation could exceed its 2% target. This hike, combined with signals from Federal Reserve officials indicating a rate hike this year and the European Central Bank acting first last week, has made the tightening cycle of major central banks around the world increasingly clear, further reinforcing market expectations that the Bank of Japan will accelerate its moves.

The pace of tightening may accelerate, terminal rate expectations shifted higher

The survey results show that market forecasts for the terminal rate in this cycle of BOJ rate hikes have risen noticeably compared to previous expectations. Responding economists now project the median peak rate in this cycle to be 1.75%, higher than the 1.5% from early June's poll. By the end of 2027, the median rate is expected to be 1.5%, implying another rate hike in 2026, with a further increase in 2027.

Marcel Thieliant, Asia-Pacific Head at Capital Economics, said in the survey response, “Given that the Bank of Japan now sees downside risks to economic activity as diminished and upside risks to inflation as increased, we expect policymakers to accelerate the tightening cycle. We now project another rate hike in October, with an additional three hikes by 2027.” According to this path, the BOJ overnight lending rate would reach 2% by end-2027, near the upper end of survey forecasts.

Vice Governor chaired the press conference, no clear acceleration signal released

It's notable that the post-meeting press conference was chaired by Vice Governor Shinichi Uchida, as Governor Kazuo Ueda was hospitalized last week. Several economists pointed out that Uchida did not give any clear signals regarding accelerating the pace of rate hikes at the conference.

Chotaro Morita, Chief Strategist at All Nippon Asset Management, said, "The decisions at each policy meeting may become more independent, rather than simply following a preset normalization path. The Bank of Japan will also face greater pressure in communicating its policy decisions, needing to provide detailed assessments of economic and price trends."

June rate hike expectations were well prepared, communication recognized by the market

The formation of rate hike expectations this time did not come suddenly. At the April meeting, three officials voted in favor of a hike but were rejected, resulting in a split vote. Subsequently, several officials who had previously voted to hold rates steady publicly expressed support for a hike, causing expectations for a June rate rise to build steadily.

The survey shows that two-thirds of respondents rate the Bank of Japan's pre-decision communication as "good" or "very good," with only 5% rating it as poor, reflecting overall recognition of the central bank's policy transparency.

On the exchange rate front, the yen remained around 160 per U.S. dollar after Tuesday's meeting, and traders remain wary of further interventions. Previously, after Fed officials signaled a rate hike this year, the yen fell to its lowest level against the dollar since July 2024, raising intervention risks. Naka Matsuzawa, Chief Strategist at Nomura Securities, pointed out, "As the U.S. and Europe move to rate hikes, the Bank of Japan will likely have no choice but to accelerate its own hikes more than previously expected, to avoid falling further behind the curve."

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