Reuters survey: The Bank of Japan is expected to raise interest rates to 1.50% in December, maintaining the pace of quarterly rate hikes

The Zhitong Finance App learned that according to a Reuters survey, most economists expect the Bank of Japan to raise interest rates to 1.50% in December, continuing the faster pace of quarterly rate hikes in the current round of austerity after the June and September rate hikes — at the beginning of this cycle, the Bank of Japan only raised interest rates once a year.

The weak yen and the war in the Middle East are driving up energy and import costs, increasing inflationary pressure on Japan. It is expected that interest rates will be raised at least twice, and the number of respondents will increase to 2.0% by the middle of next year. The yen has been under heavy sell-off pressure for most of this year, triggering intervention by the Japanese authorities and the US Treasury. Recently, the yen has stabilized relatively, which also provided support for the December interest rate hike.

Last week, Bank of Japan Reviewer Junko Koeda said that given the significant upward risk of inflation, the central bank should not be overly cautious about raising interest rates — interest rates are currently at their highest level in 31 years.

In the survey conducted from October 13 to 19, 54 out of 78 economists (nearly 70%) expected the Bank of Japan to raise the policy interest rate to 1.5% this quarter, which is nearly double that of the previous survey. Of the 54 respondents who specified the month of interest rate hikes, about 80% chose December, and only 2% chose the Bank of Japan's next two-day policy meeting, which ends on October 30.

“Given that both the US and Europe are likely to raise interest rates before the end of the year, the yen sell-off may accelerate if the Bank of Japan delays action until the New Year.” Kazutaka Maeda, senior economist at the Meiji Yasuda Research Institute, said.

Other Reuters surveys show that the Bank of Japan is expected to stand still this month, while the Federal Reserve and the European Central Bank are expected to raise interest rates in December.

“The economy is not overheated to the point where continuous interest rate hikes are needed, and the price trend is within the range expected by the Bank of Japan.” Takeshi Minami, chief economist at Norinchukin Research Institute, said.

Sources said that many Bank of Japan officials are inclined to evaluate more data to determine the impact of previous interest rate hikes on financial conditions.

Interest rates are expected to rise to 2% or higher

Looking ahead to next year, 39 out of 65 analysts (60%) expect the policy interest rate to reach 1.75% by the end of June next year. The median ratio is the same as in the September survey.

Of the 41 respondents who answered additional questions, nearly half thought 1.75% would be the terminal interest rate. However, interest rates are expected to rise to 2.00% or more to 51%, up from 40% in September and 36% in August.

In September, two review committee members appointed by Prime Minister Sanae Takaichi to support a loose fiscal policy opposed the decision to raise interest rates to 1.25%. Traders saw this negative vote as a sign that the Bank of Japan's interest rate hike plan might continue to face resistance from the Takaichi Sanae government, and the yen fell briefly.

Nearly three-quarters of respondents (23 out of 32) said that another negative vote on the policy committee's next rate hike could put pressure on the yen — currently the yen is only about 4% higher than the low of about 164 to $1 in 2026.

“If the negative vote comes in particular from the review committee appointed by the Takaichi Sanae government, it may be interpreted as an attempt by the government to curb interest rate hikes, thereby increasing market concerns that future policy austerity may lag behind the situation.” Kei Fujimoto, senior economist for asset management at Sumitomo Mitsui Trust, said.

Treasury bond issuance is expected to fall below 40 trillion yen

The yield on Japanese treasury bonds has recently risen in line with the sell-off in the global market, and is also driven by expectations of further interest rate hikes and concerns that Takaichi Sanae's large-scale spending and tax cuts will worsen Japan's already tight fiscal situation.

Takaichi Sanae said that the government plans to maintain the issuance of new bonds in the 2027 fiscal year budget at around 40 trillion yen (251 billion US dollars). She reiterated on Monday that Tokyo will “properly” control the scale of debt issuance.

Nearly two-thirds (15) of the 23 economists surveyed said that the amount of new bonds issued will remain below 40 trillion yen.

“The government may rush to increase treasury bond issuance as a source of funding for growth investments.” Junya Takemoto, senior economist at Sumitomo Mitsui Banking Corporation, said. “However, as concerns about rising market interest rates increase, the government may curb issuance by carrying out a comprehensive review of existing subsidies and fund budgets to ensure that treasury bond issuance does not deviate significantly from historical levels.”