Bank of Japan Likely to Raise Rates by January 2024, Despite Political Uncertainty

Observers of the Bank of Japan (BOJ) anticipate that the central bank will raise its benchmark interest rate before January 2024, with October being the most likely month for this adjustment. This expectation comes despite the political uncertainty following the resignation of the prime minister, which has led to a slight delay in the anticipated timing of the rate hike.

According to a survey, 88% of the 50 economists polled believe that the BOJ will increase the interest rate from 0.5% before the end of January. While October remains the favored month for the rate hike, the proportion of respondents who support this timing has decreased from 42% to 36% since the last policy meeting in July. This shift is attributed to the increased political uncertainty following the prime minister's resignation, which has prompted some institutions, such as the French Paris Bank, to push back their expectations for a rate hike to after October.

The survey also indicates that expectations for a rate hike in December have risen from 11% to 22%, while the proportion of respondents expecting a January hike remains relatively stable at around 30%. The political transition, including the upcoming leadership election within the Liberal Democratic Party and the subsequent parliamentary vote for the new prime minister, has added to the uncertainty surrounding the timing of the rate hike.

Despite the political turmoil, nearly 70% of respondents still view October as the earliest feasible time for a rate increase. The BOJ is scheduled to release its next quarterly economic outlook report and policy decision on October 30, which will incorporate feedback from branch managers and the results of the Tankan business survey released earlier in the month. Additionally, the report will consider the initial indications from the largest labor union regarding wage negotiations for the upcoming year.

Economists surveyed have revised their expectations for the final interest rate of this tightening cycle to a median of 1.25%, up from the previous estimate of 1%. This adjustment comes as Japan's nominal wages experienced their largest increase in seven months in July, with real wages also rising for the first time this year.

Yusuke Matsuo, a senior market economist at Mizuho Securities, noted that as long as wage and inflation cycles are expected to continue, there remains a possibility of another rate hike in October. The key inflation indicator in Japan has been at or above the BOJ's 2% target for three consecutive years. Approximately 40% of respondents believe that the BOJ may fall behind in addressing inflation, while 50% disagree with this assessment.

About 60% of respondents agree with the BOJ governor's view that overall inflation remains below the target level, but the same proportion finds the BOJ's explanation of price trends difficult to understand. The BOJ's September meeting, coinciding with the Federal Reserve's expected rate cut, has led to varied opinions among analysts. While some believe the Fed's actions will make it easier for the BOJ to raise rates, others think it will make it more difficult, and about 56% see no impact on the BOJ's policy.

Despite market expectations of a narrowing interest rate differential between the U.S. and Japan due to anticipated Fed rate cuts, the yen remains relatively weak. Approximately three-quarters of BOJ observers attribute this weakness to the central bank's cautious stance, while about 13% disagree, and some are uncertain. Observers will closely monitor the BOJ governor's assessment of risks and progress toward achieving stable inflation targets during the September 19 policy announcement.

Tsuyoshi Ueno, an executive researcher at NLI Research Institute, highlighted that the September meeting will focus on determining the timing of the next rate hike signal. He estimates a 60% chance of a rate hike this year, depending on the stability of the economic situation and the BOJ's vigilance against cost-push inflation.