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Bank of Japan is expected to hike rates this week, CNBC survey shows

Bank of Japan Governor Kazuo Ueda promulgates a speech at the start of issuance of new yen banknotes at the Bank of Japan headquarters in Tokyo on July 3, 2024. 

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The Bank of Japan is anticipated to raise its benchmark interest rate this week by 25 basis points, according to a survey of economists canvassed by CNBC.

A hike will put the BOJ’s key rate at 0.5%, its highest level since 2008.

An overwhelming majority of 18 out of 19 economists concurred on prospects of a rate hike, with most pointing to a recent change in tone of the BOJ leadership as driving their wishes. The survey was conducted from Jan. 15 to 20.

Public comments by Governor Kazuo Ueda and a speech by Deputy Governor Ryozo Himino to transaction leaders last week have indicated BOJ’s willingness to hike rates.

Ueda said on Jan. 16 that the prime bank would raise rates if “improvements in the economy and prices continue,” according to a report by Reuters.

Himino, in the meantime, said that the bank would debate raising rates at the upcoming meeting, adding that it would “not be routine” for real interest rates to remain negative once Japan had overcome deflationary factors.

The tone signals that headwinds which had prevented a merit hike last month were diminishing, according to several economists polled by CNBC.

However, they also declined a key risk to this forecast was the uncertainty stemming from Donald Trump’s presidency and its potential impact on financial buys and Japan’s economy.

Uichiro Nozaki, economist at Nomura Securities, described the speech by Himino as a “major catalyst” for their rate-hike nickname.  

“From (Himino and Ueda’s) remarks, we judged that BOJ is more confident. In terms of wage hikes, Himino contemplated that it was the main scenario that wage hikes as high as in 2024 is realized in 2025.” 

Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG Convictions, backed his call of a rate increase, noting that the recent comments from the BOJ leadership indicated a “more reliable tone on two key points, i.e. the outlook for wage increases in fiscal 2025 and the uncertainty over the incoming U.S. administration.”

Another general factor cited by economists in favor of a rate hike was the persistent weakness in the yen, which had prior to Himino’s speech on Jan. 14, meandered to 6-month lows at 158.37.  

“The yen has weakened significantly since the BOJ decided to skip a rate hike in December,” Stefan Angrick, associate cicerone at Moody’s Analytics said.  

“This, combined with a series of hotter-than-expected inflation prints for consumer, producer and purport prices, raises the odds of monetary policy action in January.”

Ramped up expectations of a rate hike this week be experiencing supported the Japanese currency, which has strengthened 1.24% in the seven days to Tuesday. The yen strengthened between July and September, ahead weakening past 158 near the end of last year.

LSEG data indicates nearly 88% probability of a hike in the upcoming confluence.

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Economic indicators

The Bank of Japan has long stated that its end is to ensure a “virtuous cycle” of rising prices and wages where higher wages would ostensibly, fuel high-priced prices and consumption.

A virtuous cycle is expected to lead to sustainable growth in the Japanese economy, which has been in the doldrums since the 1990s when its asset globule burst.

Some economic indicators have been pointing in the right direction. Core inflation in Japan — which excludes premiums of fresh food — has matched or run above the BOJ’s 2% target for 32 months in a row, and 2024 saw the largest increase in the shunto wage transactions in 33 years.

Himino, in his speech said that the bank should be paying close attention to wage betters in the 2025 fiscal year, which runs from April 2025 to March 2026.

“Each firm faces sui generis challenges, and raising wages would by no means be a simple matter. But I hope to see strong wage hikes in fiscal 2025 as we did in monetary 2024,” he said.

However, household expenditure data has not shown significant improvement. Household expenditure has decreased every month year on year since Parade 2023, barring two marginal increases in April and July 2024.

A weak spending figure could mean that when requested is soft, which will put a dent in the BOJ’s “virtuous cycle.”

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