Bank of Japan Seen Holding Rates at 1.25% This Week, With Hike Still Possible

The Bank of Japan is widely expected to leave its policy rate at 1.25% when its two-day meeting ends on Friday, according to a CNBC survey. All 16 respondents forecast no change, though many see room for another increase in the months ahead.

The central bank lifted rates last month to their highest level in 31 years, which is why a pause is the consensus view now. Every respondent also said the BOJ is likely to lay the groundwork for a hike in December or January, as domestic inflation and wages keep climbing.

Opinions differ on how quickly the bank can move. Homin Lee, senior macro strategist at Lombard Odier, said macroeconomic conditions support further tightening, but added that the policy board may lack the consensus for successive hikes given the fragility of the domestic bond market. Sosuke Nakamura, an economist at Citi Research, said he sees no clear sign that inflation is accelerating enough to justify consecutive increases.

Recent data points to firmer price pressures. Japan's core inflation, which excludes fresh food, rose 2.1% in September from a year earlier, the highest reading this year. A weak yen is raising import costs, and elevated energy costs are feeding through to prices even as government subsidies cushion consumers. Inflation-adjusted wages rose 1.5% year on year in August, the eighth straight monthly gain.

Finance Minister Satsuki Katayama reportedly told lawmakers last week that Japan was "on the cusp of shifting to a period of sustained inflation driven by rising wages," while acknowledging that higher import costs were also lifting prices. Reuters and The Japan Times have reported that the BOJ is expected to declare its 2% underlying inflation goal met at this meeting. Ryutaro Kimura of BNP Paribas Asset Management said he is watching whether the policy statement changes from saying underlying inflation "has been approaching 2 percent" to saying it "has reached 2 percent."

On currency, nine respondents expect the yen to trade between 157 and 158 per dollar over the next month. Three-month forecasts were more scattered, from 150 to 160. Masahiko Loo of State Street Investment Management said BOJ normalization, higher domestic yields and shifting institutional flows should gradually narrow the rate gap and draw capital back to Japan, but warned that "elevated U.S. yields should prevent a straight-line yen rally."

The yen strengthened and Japanese government bond yields fell last week on safe-haven demand during a sell-off in AI stocks. That reversed earlier moves this month, when Prime Minister Sanae Takaichi's spending plans and a global bond sell-off pressured both assets. Nine respondents see the 10-year JGB yield at 3% to 3.1% by year-end, up from 2.809%, and seven expect the 30-year yield at 4% to 4.1%, compared with 3.829% as of Tuesday.

Takuji Aida, chief Japan economist at Credit Agricole, said the next hike is likely in January, when the BOJ is due to release its quarterly outlook report on economic activity and prices. Thirteen respondents expect a terminal rate of 1.75% to 2% by around mid-2027. Masato Koike of SOMPO Institute Plus said he expects the bank to stop at about 1.75% to avoid excessive downward pressure on growth.

The survey was conducted from Oct. 14 to 26 among 16 economists and analysts.