BOJ to postpone rate hike to Q1 next year, tiny majority of economists say: Reuters poll

A Reuters poll of economists indicates the Bank of Japan is unlikely to raise interest rates again this year, primarily due to uncertainty surrounding U.S. tariff policies, with a slight majority now expecting the next 25-basis-point hike in early 2026. The poll also suggests the BOJ will slow the pace of tapering its government bond purchases from next fiscal year, while a majority expects the government to cut back on issuance of super-long bonds amid concerns over rising debt levels and weak auction results.

Analysis

A Reuters poll of economists indicates a significant shift in expectations for Bank of Japan (BOJ) monetary policy, with a slight majority (52% of 58 respondents) now anticipating no further interest rate hikes in 2024, maintaining borrowing costs at 0.50%. This represents a reversal from a May poll where 52% expected rates at 0.75% by end-2025. The primary driver for this revised outlook is heightened uncertainty stemming from potential U.S. tariff policies, which threatens the economic outlook. Consequently, the next 25-basis-point increase is now largely projected for early 2026, despite BOJ Governor Kazuo Ueda's assertion of readiness to tighten if underlying inflation approaches the 2% target. Interest rate futures reflect this cautious sentiment, pricing in only about 17 basis points of tightening by year-end. Alongside a delayed rate hike, a majority of economists also foresee the BOJ slowing its pace of tapering Japanese Government Bond (JGB) purchases from the current circa 400 billion yen per quarter beyond April of the next fiscal year, with predicted quarterly taper sizes ranging from 200 to 370 billion yen. This cautious approach to unwinding its massive JGB holdings (still roughly half of outstanding JGBs), which began with an exit from massive stimulus in March of the previous year and subsequent rate hikes to 0.50% by January, is further complicated by concerns over Japan's public finances. Reflecting these fiscal pressures, three-quarters of surveyed economists expect the government to reduce issuance of super-long bonds, particularly 30-year, 40-year, and 20-year JGBs, due to consistently weak auction results, dwindling traditional buyer demand, and record high yields on these instruments. This overall cautious and uncertain outlook, underscored by a moderately negative sentiment score of -0.4, suggests potential headwinds for Japan's path to monetary normalization.

Key Decisions for Investors

• Investors should anticipate a more prolonged period of accommodative monetary policy from the Bank of Japan, which may continue to weigh on the yen and support interest-rate sensitive assets, but remain vigilant regarding U.S. tariff developments as a key risk factor.
• Fixed income investors focusing on JGBs should closely monitor upcoming government decisions on super-long bond issuance and potential buybacks, as reduced supply could significantly impact yields and liquidity in this segment, warranting a review of duration exposure and maturity preferences.
• Given the prevailing uncertainty and the BoJ's cautious stance, portfolio allocations should factor in potential delays to Japan's economic re-acceleration and the persistent influence of external trade policy on domestic monetary decisions, suggesting a need for careful risk management.