Bank of Japan Governor Kazuo Ueda delivers a speech at the launch of the 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 expected to raise its benchmark interest rate by 25 basis points this week, according to a survey of economists polled by CNBC.
The increase will bring the key BOJ rate to 0.5%, the highest level since 2008.
An overwhelming majority of 18 out of 19 economists agreed on the prospect of a rate hike, with most pointing to a recent change in tone from BOJ leadership as a driver of their expectations. The research was conducted from January 15 to 20.
Public comments Governor Kazuo Ueda speech Deputy Governor Ryozo Himino told business leaders last week that the BOJ was willing to raise rates.
On Jan. 16, Ueda said the central bank would raise rates if “improvements in the economy and prices continue,” according to a Reuters report.
Himino, meanwhile, said the bank would discuss raising interest rates at an upcoming meeting, adding that it “would not be normal” for real interest rates to remain negative after Japan overcomes deflationary factors.
The tone signals that the headwinds that prevented a rate hike last month are easing, according to several economists polled by CNBC.
However, they also flagged a key risk to this forecast as uncertainty arising from Donald Trump’s presidency and its potential impact on financial markets and the Japanese economy.
Uichiro Nozaki, an economist at Nomura Securities, described Himino’s speech as a “major catalyst” for their call for a rate hike.
“From the remarks (of Himino and Ueda), we concluded that the BOJ has more confidence. Regarding the wage increase, Himino said that the main scenario is that the wage increase like in 2024 is realized in 2025.”
Takesh Yamaguchi, chief economist for Japan at Morgan Stanley MUFG Securities, backed his call for a rate hike, noting that recent comments from BOJ leadership indicated “a more positive tone on two key points, ie the outlook for wage increases in fiscal 2025 and the uncertainty surrounding the new US administration.”
Another common factor cited by economists in favor of a rate hike was the continued weakness of the yen, which fell to a 6-month low of 158.37 before Himin’s January 14 speech.
“The yen has weakened significantly since the BOJ decided to skip raising interest rates in December,” said Stefan Angrick, associate director at Moody’s Analytics.
“This, combined with a series of higher-than-expected consumer, producer and import price inflation prints, raises the prospect of monetary policy action in January.”
Heightened expectations of a rate hike this week supported the Japanese currency, which gained 1.24% in the seven days to Tuesday. The yen it strengthened between July and September, before weakening past 158 at the end of last year.
LSEG data indicates an almost 88% probability of an increase in the upcoming meeting.
Economic indicators
The Bank of Japan has long argued that its goal is to ensure a “virtuous cycle” of rising prices and wages, where higher wages would supposedly spur higher prices and consumption.
The good cycle is expected to lead to sustained growth in Japan’s economy, which has been in decline since the bursting of the property bubble in the 1990s.
Some economic indicators point in the right direction. Core inflation in Japan — which excludes fresh food prices — has been at or above the BOJ’s 2% target for 32 consecutive months, and in 2024 experienced the largest increase in shunt wages negotiations in 33 years.
Himino said in his speech that the bank should pay close attention to salary increases in fiscal year 2025, which runs from April 2025 to March 2026.
“Every company faces unique challenges, and raising wages would by no means be easy. But I hope to see strong wage increases in fiscal 2025 like we did in fiscal 2024,” he said.
However, data on household expenditure did not show a significant improvement. Household spending has decreased every month year-on-year since March 2023, except for two marginal increases in April and July 2024.
A weak consumption figure could mean that demand is weak, putting a dent in the BOJ’s “virtuous cycle”.
