The Bank of Japan will raise its benchmark rate to 1.00% by end-June, with nearly two-thirds of economists in a Reuters poll predicting the move, and a hike this month or in June seen as equally likely amid uncertainty over the fallout from the Iran war.
Markets are struggling to read the BOJ ahead of its April 27-28 policy meeting, with officials likely to offer far less forward guidance than in past decisions, heightening the risk of a surprise.
Economists still broadly expect the BOJ to tighten again this quarter, a view largely unchanged since the outbreak of the U.S.-Israeli war with Iran on February 28. If anything, the conflict has reinforced hawkish expectations by stoking fears of higher energy prices, renewed inflation pressure and further yen weakness.
In the April 7-14 survey, 65% of economists, 46 of 71, forecast the policy rate would reach 1.00% by end-June, up from 60% in March and 58% in February. Of 40 economists who specified when, 38% chose April and 35% June. Last month, June led at 32% with July at 30% and April 27%.
A hike next week is possible, said Hiroshi Namioka, chief strategist at T&D Asset Management, noting that policymakers are wary of falling behind the curve as a weakening yen bolsters the case for early action. The yen has weakened about 2% against the U.S. dollar since the war began.
But Junki Iwahashi, senior economist at Sumitomo Mitsui Trust Bank, said a rate hike this month was unlikely.
"While a spike in crude oil prices caused by worsening conditions in the Middle East would temporarily push up inflation through cost-push pressures, it would also weigh on the economy, making the rate-hike decision difficult," Iwahashi said, predicting a June move.
The BOJ "will want a little more time to assess the situation," he said.
Beyond June, median forecasts showed the BOJ raising borrowing costs to 1.25% in the fourth quarter, a little earlier than previously expected.
Another 25-basis-point hike to 1.50% was expected for the third quarter of 2027, according to medians, with rates then staying there until year-end although a handful expect a rise to 1.75%.
With inflation remaining above target for most of the past four years, the BOJ has been laying the groundwork for a near-term hike by highlighting mounting price pressures.
Unlike its U.S. and European peers, Japan's policy rate at 0.75% remains below the neutral rate - one that neither stimulates nor restricts economic activity. With inflation around 2% the BOJ risks overheating the economy by keeping real borrowing costs deeply negative.
That hawkish backdrop, however, is being tested by escalating uncertainty over the Middle East war, where fast-moving developments are unsettling markets and clouding the outlook for the import-dependent economy.
Source: Reuters