BOJ to Raise Interest Rates Again in Q4, Possibly in October, Say Economists: Reuters Poll

A recent Reuters poll indicates that nearly two-thirds of economists now anticipate the Bank of Japan will raise its key interest rate by at least 25 basis points to 0.75% later this year, up from just over half last month, with October being the most favored timing. Despite renewed bets for a Federal Reserve rate cut due to U.S. job market weakness, most analysts believe this will not deter the BOJ's move towards tighter monetary conditions, driven by over three years of consumer inflation exceeding its 2% target. Separately, concerns are growing among economists regarding potential pressure for increased fiscal spending following recent Japanese election results.

Analysis

A recent Reuters poll indicates a strengthening consensus among economists for a Bank of Japan (BOJ) interest rate hike later this year, driven by consumer inflation that has persisted above the 2% target for over three years. The probability of a 25-basis-point hike to at least 0.75% in the next quarter is now seen at 63% by surveyed economists, an increase from 54% in the prior month. While the September meeting is expected to see no change, October is identified as the most likely month for a hike, a timing that would allow the central bank to assess U.S. monetary policy and publish its quarterly outlook report. Notably, this hawkish expectation is largely independent of U.S. Federal Reserve actions, as 70% of analysts believe a potential Fed rate cut would not deter the BOJ's move. However, this monetary tightening path faces two key risks highlighted in the report: the BOJ's own wariness about the impact of potential U.S. tariffs on economic growth, and growing concerns about domestic fiscal policy. More than two-thirds of economists are worried about pressure for increased fiscal spending following recent elections, which could create what one analyst termed "short-sighted policy choices" and challenge long-term fiscal sustainability.

Key Decisions for Investors

• Consider positioning for a stronger Japanese Yen and higher Japanese government bond yields, reflecting the growing consensus for a Bank of Japan rate hike in the fourth quarter.
• Investors should closely monitor Japanese political developments for signs of fiscal expansion, as this is identified as a key risk that could complicate the BOJ's policy trajectory and impact fiscal sustainability.
• Evaluate portfolio sensitivity to a potential monetary policy divergence, as the BOJ's tightening path appears decoupled from the U.S. Federal Reserve's leaning towards an interest rate cut.