BoJ Holds 1.25% Rate, Eyes Winter Hike

The Bank of Japan is projected to keep its benchmark interest rate at 1.25% when its two-day policy meeting concludes on Friday. A CNBC survey of 16 economists and analysts found unanimous agreement that the central bank will pause its tightening cycle this month. However, every respondent expects the bank to prepare the ground for a rate increase in December or January. The move follows last month's decision to raise rates to their highest level in 31 years.

Homin Lee, senior macro strategist at Lombard Odier, noted that macroeconomic factors support further policy tightening. He warned, however, that the policy board may lack sufficient consensus for consecutive hikes due to fragility in the domestic bond market. Sosuke Nakamura, an economist at Citi Research, disagreed on the pace, stating there are no clear signs that inflation is accelerating enough to justify back-to-back rate increases.

Domestic data indicates persistent price pressures. Core inflation in Japan, which excludes fresh foods, rose 2.1% year over year in September. This marked the highest reading of the year as a weak yen increased import costs and elevated energy prices passed through to consumers. Government subsidies have helped absorb some of these rising costs for households. Inflation-adjusted wages also rose for the eighth consecutive month in August, climbing 1.5% from the prior year.

Finance Minister Satsuki Katayama told lawmakers last week that Japan is on the cusp of a period of sustained inflation driven by rising wages. She acknowledged that higher import costs are also pushing prices up. Reports from Reuters and The Japan Times indicate the Bank of Japan is expected to declare at this week's meeting that its 2% underlying inflation target has been met. Ryutaro Kimura, senior fixed income strategist at BNP Paribas Asset Management, is watching for a change in the monetary policy statement. He expects the phrasing to shift from inflation "approaching" 2 percent to having "reached" that level.

Currency markets reflect mixed expectations for the yen. Nine respondents in the survey expect the Japanese currency to trade between 157 and 158 against the U.S. dollar over the next month. The three-month outlook is more scattered, with targets ranging from 150 to 160. Masahiko Loo, senior fixed income strategist at State Street Investment Management, said that BoJ normalization and higher domestic yields should gradually narrow rate differentials and pull capital back toward Japan. He added that elevated U.S. yields should prevent a straight-line rally for the yen.

The yen strengthened against the dollar and Japanese government bond yields fell last week due to safe-haven demand amid a sell-off in AI stocks. This was a reversal from earlier in the month, when Prime Minister Sanae Takaichi's spending plans and a global bond sell-off pressured those assets. Nine respondents expect the yield on the benchmark 10-year JGBs to reach between 3% and 3.1% by year end, up from the current 2.809%. Seven respondents expect the 30-year JGB yield to rise to 4% to 4.1% from 3.829% as of Tuesday.

Takuji Aida, chief Japan economist at Credit Agricole, believes the next rate hike is likely in January. That month coincides with the release of the BOJ's quarterly outlook report, which assesses economic activity and prices. Thirteen respondents expect the terminal rate to settle between 1.75% and 2% by mid-2027. Masato Koike, senior economist at SOMPO Institute Plus, noted that while data shows the rate is closer to the neutral 2% level, the bank will likely stop raising rates at 1.75% to avoid excessive downward pressure on growth.

The survey was conducted from October 14 to 26. It captured the views of 16 economists and analysts regarding the bank's near-term policy path and long-term interest rate trajectory.