The Bank of Japan opens the door to rate hike in June! More than 60% of economists bet on interest rates rising to 1%

Against the background of concerns about escalating inflation triggered by the Middle East conflict, the Bank of Japan is expected to continue its monetary policy normalization. In the latest survey conducted from May 7 to May 14, 65% of the surveyed economists (40 out of 62) expect the Bank of Japan to raise interest rates by 25 basis points in June, bringing the benchmark interest rate to 1%, which is consistent with the April survey results. Among the 62 surveyed economists, all except one expect the Bank of Japan to raise interest rates before the end of September. At the same time, the survey indicates that the Bank of Japan is expected to raise the benchmark interest rate to 1.25% in the fourth quarter of this year, and further increase it to 1.50% by the third quarter of next year, also consistent with last month's survey results. Additionally, in the survey, nearly three-quarters of the surveyed economists said that the continuous inflation over the next 12 months poses a greater threat to the Japanese economy than a slowdown in demand. Yuji Matsuo, senior market economist at Mizuho Securities, said: "Considering that economic, price, and wage conditions that support rate hikes still exist, we believe that the meeting in June, about six months after the December 2025 meeting, is the most likely next rate hike." The door to rate hikes in June is wide open The Bank of Japan kept rates unchanged at 0.75% last month to assess the impact of the Middle East conflict. However, three of the nine members of the Bank of Japan's Monetary Policy Committee raised objections and advocated for an increase to 1%, signaling policymakers' increasing vigilance to the inflationary pressure caused by the energy shock from the Middle East conflict. At last month's policy meeting, one more member of the Bank of Japan's Monetary Policy Committee, who voted to maintain the rate, publicly changed to a hawkish stance, calling for a rate hike as soon as possible. The member said: "I judged at that time (April) that there was no need for a hasty rate hike, but if there is no clear signal of economic downturn, a rate hike should be done as soon as possible." This statement suggests that he may join the hawkish camp next month and vote for a rate hike. The expectations of economists for a rate hike in June by the Bank of Japan also echo the minutes of the Bank of Japan's April meeting. The minutes of that meeting showed that several members of the Monetary Policy Committee advocated for an early rate hike, with one member openly stating that a rate hike is possible in June. The minutes cited one member as saying, "Even if there are uncertainties in the development of the Middle East situation, it is highly likely that the Bank of Japan will start raising rates at the next meeting." Another member's opinion indicated, "Although there is no need for immediate action at the current stage, as long as there are no clear signs of economic slowdown, the Bank should start raising rates as soon as possible." Another opinion pointed out that the current policy rate of the Bank of Japan is still well below the neutral rate of the economy, and the Bank should steadily raise rates every few months; if inflation risks increase further, it should accelerate the pace of rate hikes decisively. The minutes also showed that many members expressed concern that the Middle East conflict is intensifying inflationary pressures, increasing the risk of second-round effects, and bringing forward the timing for the core inflation rate to reach 2%. The minutes quoted one member as saying, "With significant upward revisions to price expectations, the uncertainty of the Middle East situation remains high, and all scenarios show further upward risks in prices." The member added, "In addition, if supply-side constraints materialize, it will exert strong upward pressure on prices." Data released last month showed that concerns about rising energy prices due to the Middle East conflict led to the first five-month acceleration in Japan's core inflation rate, excluding fresh food prices, rising to 1.8% year-on-year in March, up from 1.6% in February. The Bank of Japan also raised its forecast for the core inflation rate excluding fresh food for the 2026 fiscal year (April 2026 to March 2027) from 1.9% predicted in January to 2.8%. It is worth mentioning that the latest economic survey report on Japan issued by the Organization for Economic Cooperation and Development (OECD) predicts that the Bank of Japan's policy interest rate will rise to 2% by the end of 2027. The OECD pointed out that if Japanese inflation remains around 2%, the current policy rate is still at the lower end of the neutral rate range for the economy, and the Bank of Japan should continue with gradual rate hikes to guard against the risk of overheating the economy. The 2% terminal rate forecast given by the OECD is more hawkish than the general expectation of economists in the above-mentioned survey, and more aggressive than the International Monetary Fund's (IMF) view that institution expects the Bank of Japan's terminal rate for this tightening cycle to be only about 1.5%. However, the pace of the Bank of Japan's normalization of its monetary policy may be constrained by the government. A government advisory group warned that, given the deteriorating corporate financing environment and the uncertainty brought by the Middle East situation, the Bank of Japan should be cautious in formulating monetary policy. This statement is seen as a direct reminder to the Governor of the Bank of Japan, Haruhiko Kuroda, indicating that accelerating rate hikes in the short term may face stronger policy constraints, especially at the upcoming monetary policy meeting next month. Rate hikes may help the yen "break the siege" As the Bank of Japan maintained rates unchanged in April and the Japanese government subsequently had to intervene in the currency market several times to support the yen falling below the key level of 160 yen against the dollar, the Bank of Japan is facing increasing pressure. Many believe that without more tightening monetary policy measures, the approximately 10 trillion yen (about $63.5 billion) intervention funds that the Japanese authorities have put into the currency market to stem the decline of the yen is limited in effect. Unlike its counterparts in the US and Europe, Japan's current policy rate of 0.75% is still lower than the "neutral rate" that neither stimulates nor restrains economic activity. With an inflation rate of around 2%, if the Bank of Japan continues to maintain deeply negative real interest rates, it may lead to overheating the economy and further weaken the yen. Hiroshi Nango, chief strategist at T&D Asset Management, said: "The Japanese authorities are sending signals that they are prepared to intervene to curb the depreciation of the yen, but considering the negative real interest rates and the possibility that high oil prices may worsen the trade balance, the effect may be limited." Kyohei Morita, chief economist at Nomura Securities, also suggested that the Bank of Japan is likely to raise rates in June to address the upward inflation risk brought about by yen depreciation. The weakening yen is pushing up import costs and damaging the Japanese economy.