[TOKYO] Bank of Japan (BOJ) watchers still expect the pace of interest rate hikes to be gradual, although they now see rates rising to a higher level in the current cycle, according to the latest Bloomberg survey.
All 52 economists expect no policy change at the two-day meeting ending on Mar 19, according to the poll. July remained the favourite choice for the next hike with 48 per cent expecting a move then, dropping from 56 per cent in the previous survey.
A clear majority of 76 per cent predicts the BOJ will stick to a roughly once-every-six-months pace for hikes pace, seeing the next increase coming between June and September. At the same time, a growing minority forecasts an earlier move, with 13 per cent projecting the next increase on May 1, up from 4 per cent in the last survey.
The broad picture of how economists see the central bank’s rate hike trajectory has not changed. One difference since January, however, is how far they now expect the BOJ to keep raising its benchmark. The economists surveyed now anticipate the terminal rate to be 1.25 per cent. That’s up from 1 per cent in the previous survey and shows a stark shift from a year ago, when they saw it at 0.5 per cent.
The changing perceptions correspond with recent market moves. Japan’s benchmark 10-year bond yields have kept increasing over the past month, hitting the highest level since 2008 this week as investors reassessed the final destination of the BOJ’s current hiking cycle.
Governor Kazuo Ueda’s board gathers next week after raising borrowing costs to 0.5 per cent in January. Economists will parse Ueda’s portrayal of greater uncertainties in the global economy in light of rising protectionist sentiments. Since January, US President Donald Trump has ramped up his tariff threats in earnest, putting central bankers across the world on guard.
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“Rapid rate hikes are not necessary given high uncertainties in the global economy, including the risk of hits from US tariffs,” Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research & Consulting, wrote in a survey response. “I expect the next hike to be around July and a gradual pace to be maintained.”
Almost three-quarters of BOJ watchers said that given Trump’s recent remarks, tariffs could exert enough of a drag on Japan’s economy to delay the BOJ’s rate hike path, according to the poll.
Even as clouds loom overseas, recent economic data have shown that Japan’s economy and inflation are moving roughly in line with BOJ’s outlook, according to more than half of the respondents. A quarter of those surveyed said the current economic data are stronger than the BOJ’s view.
Japan’s overall inflation accelerated to 4 per cent in January, double the BOJ’s price target and the fastest pace in two years. The elevated cost of living brings closer scrutiny to the initial result of the spring wage negotiations due Friday.
The BOJ will not necessarily be disappointed even if the results come in below last year’s 5.28 per cent result, as long as wage increase pledges top 4.4 per cent, according to the median estimate in the poll. The initial tally a year ago gave a final, clear push for the bank to end its historic easing programme and scrap negative rates.
On the question of the earliest possible timing for the next hike, May was the most popular pick with 50 per cent of respondents choosing it. Almost a quarter said June, while another 10 per cent pointed to the meeting next week.
“I will not deny there’s a chance that the next rate hike could be brought forward to May,” said Ryutaro Kono, chief Japan economist at BNP Paribas. “Inflation-related data are likely to deviate on the upside for the time being, while strong results are expected from the spring wage talks.”
Many analysts cited the yen as a risk factor that could alter the course of the BOJ’s policy path, after a weak yen has played a key role in the three rate hikes in the past year.
“Unless you know the level of the yen against the US dollar right before each meeting, it seems meaningless to talk about the chance of a rate hike,” said Daisuke Karakama, chief market economist at Mizuho Bank. “Ultimately, if the yen gets to 165 per US dollar before the March gathering, expectations for a rate hike will ramp up.” BLOOMBERG
