BOJ Expected to Hike Rates in Q4 as Inflation and Wage Pressures Build

A growing majority of economists now expect the Bank of Japan (BOJ) to raise interest rates before the end of 2025, marking a potential turning point after years of ultra-loose monetary policy. According to a Reuters survey conducted between October 14 and 20, about 60% of economists forecast a rate hike in the fourth quarter, likely lifting the short-term policy rate from 0.5% to 0.75%. Nearly all respondents anticipate the rate will reach at least 0.75% by March 2026.

The shift reflects a changing economic environment in Japan. Inflation has remained above the BOJ’s 2% target for an extended period, supported by strong wage growth and sustained domestic demand. The yen’s sharp depreciation—recently surpassing ¥150 per dollar—has also intensified price pressures through higher import costs. These dynamics have strengthened the case for a gradual tightening of monetary policy to prevent overheating.

Economists in the poll noted that the expected expansionary fiscal policies under Prime Minister–elect Sanae Takaichi are unlikely to deter the central bank’s move toward normalization. Most analysts believe the BOJ will seek to reestablish credibility by signaling independence from fiscal policy, especially as Japan’s public debt continues to exceed 250% of GDP.

For markets, a BOJ rate increase could have far-reaching implications. A stronger yen would likely weigh on export-heavy equities but could restore some balance in Japan’s bond markets after years of yield suppression. Rising domestic yields might also encourage Japanese investors to repatriate capital, influencing global bond demand.

Still, policymakers face a delicate balancing act. Higher rates risk slowing growth and complicating debt management for both households and the government. Yet maintaining ultra-loose policy amid persistent inflation could undermine financial stability and weaken confidence in the central bank’s inflation-targeting framework.

In essence, the BOJ appears to be approaching a critical inflection point: signaling the end of negative-real-rate conditions while trying to ensure the recovery remains intact. Investors are now positioning for Japan’s slow but meaningful departure from the era of zero interest rates—a move that could reshape global capital flows in the months ahead.