Bank of Japan to hold rates at 1.25% before December hike

The Bank of Japan will keep its policy rate at 1.25% when its two-day meeting concludes on Friday, according to a CNBC survey. All 16 economists and analysts polled expect the central bank to stand pat after raising rates last month to their highest level in 31 years. The group anticipates the bank will signal a path toward a hike in December or January.

Homin Lee, a senior macro strategist at Lombard Odier, noted that macroeconomic factors support further tightening. He warned that the policy board may lack consensus for successive hikes due to fragility in the domestic bond market. Sosuke Nakamura, an economist at Citi Research, argued that inflation has not accelerated enough to justify consecutive rate increases.

Japan's core inflation excluding fresh foods rose 2.1% year over year in September. This marked the highest reading of the year as a weak yen and energy costs pushed prices up. Inflation-adjusted wages rose for the eighth consecutive month in August, climbing 1.5% from the prior year. Finance Minister Satsuki Katayama told lawmakers last week that the country is on the cusp of sustained inflation driven by rising wages.

Reports from Reuters and The Japan Times indicate the BOJ will declare its 2% underlying inflation target has been met. Ryutaro Kimura, a senior fixed income strategist at BNP Paribas Asset Management, is watching for a change in phrasing from approaching 2 percent to reaching 2 percent in the monetary policy statement.

Respondents expect the yen to trade between 157 and 158 against the dollar over the next month. Masahiko Loo of State Street Investment Management said capital flows should pull back toward Japan, but elevated U.S. yields will prevent a straight-line rally. Japanese government bond yields fell last week on safe-haven demand after a sell-off in AI stocks.

Nine respondents forecast the 10-year JGB yield will reach 3% to 3.1% by year's end, up from 2.809%. Seven expect the 30-year yield to rise to 4% to 4.1% from 3.829%. Takuji Aida of Credit Agricole predicts the next rate hike will occur in January when the bank releases its quarterly outlook.

Thirteen respondents project a terminal rate of 1.75% to 2% by mid-2027. Masato Koike of SOMPO Institute Plus stated that the policy rate is closer to the neutral level of 2%, but the bank will likely stop raising rates at 1.75% to avoid excessive downward pressure on growth.