BOJ to raise interest rates again in Q4, possibly in October, say economists: Reuters Poll

A recent Reuters poll indicates a significant increase in expectations for the Bank of Japan to raise its key interest rate again later this year, with nearly two-thirds of economists now forecasting a hike to at least 0.75% from 0.50% next quarter, up from 54% last month. While 92% expect no change at the mid-September meeting, October is the most anticipated month for the next move, aligning with market pricing for a further quarter-point hike by year-end, even as political shifts raise concerns about potential fiscal spending expansion.

Analysis

A Reuters poll of economists indicates a strengthening consensus for further monetary tightening by the Bank of Japan, with nearly two-thirds (63%) now anticipating a rate hike of at least 25 basis points in the next quarter, an increase from 54% in the prior month's poll. While a 92% majority foresees no policy change at the mid-September meeting, October has emerged as the most probable month for a hike, cited by 38% of respondents, as it allows the BOJ to assess U.S. monetary policy and domestic political shifts alongside its quarterly outlook report. This expectation aligns with current market pricing, which has factored in one quarter-point hike by year-end. The primary driver for this hawkish tilt is persistent consumer inflation, which has remained above the BOJ's 2% target for over three years. Despite renewed bets for a U.S. Federal Reserve rate cut, 70% of analysts believe this will not deter the BOJ. However, significant domestic political uncertainty presents a key risk factor, with opposition parties advocating for fiscal expansion, potentially increasing what Nomura Securities' chief economist calls the risk of "short-sighted policy choices" that could undermine fiscal sustainability.

Key Decisions for Investors

• Given the growing consensus for a BOJ rate hike while the Fed may be easing, investors should closely monitor yen positions, as this policy divergence could provide further strength to the currency.
• It is prudent to re-evaluate exposure to rate-sensitive Japanese sectors, such as real estate and companies with high leverage, which could face headwinds from increased borrowing costs.
• Investors in Japanese fixed income should consider shortening duration on portfolios to mitigate the impact of rising yields on Japanese Government Bonds ahead of the anticipated Q4 rate hike.
• Pay close attention to the BOJ's October meeting and its accompanying quarterly outlook report, as these will be critical catalysts for confirming the policy trajectory and its impact on Japanese asset prices.