The Bank of Japan's tightening storm is far from over! 90% of economists are betting on another interest rate hike before December.

A recent survey shows that the majority of economists focusing on the Bank of Japan expect the central bank to raise its benchmark interest rate to the highest level since 1995 this week, and then raise rates again before the end of the year. In this survey conducted on Wednesday, 90% of the 44 economists surveyed expect the Bank of Japan to further raise its benchmark interest rate from the current 1% before the December meeting. 25% of respondents expect the next rate hike to occur in December, while another 36% believe it will happen in October. When asked about when the next rate hike might occur, close to one-quarter of respondents chose September. Observers expect the Bank of Japan to raise rates again before December On Tuesday, the Bank of Japan raised borrowing costs for the first time since December last year, citing increasing risks of exceeding the 2% inflation target. The key question now is whether the Bank of Japan needs to act faster than the market's general expectation of "one action every six months". Marcel Thieliant, Director of Asia-Pacific Economics at Capital Economics, stated in his survey response, "With the Bank of Japan now seeing downside risks to economic activity diminishing and upside risks to inflation rising, we expect policymakers to speed up the tightening cycle in the future." "We currently expect the Bank of Japan to raise rates again in October and then three more times in 2027." If Thieliant's forecast is realized, the Bank of Japan's overnight call rate will reach 2% by the end of 2027, at the high end of the range predicted in this survey. The median forecast in the survey shows the rate reaching 1.5% by the end of 2027, meaning one more rate hike in 2026 followed by one in 2027. Currently, observers of the Bank of Japan predict that the terminal interest rate of this rate hike cycle will reach 1.75%, higher than the median forecast of 1.5% earlier this month. In addition, Deputy Governor Masayoshi Nitta presided over the press conference after the meeting as Governor Haruhiko Kuroda was hospitalized last week. Many respondents noted that Masayoshi Nitta did not clearly signal an accelerated pace of rate hikes. Masayoshi Nitta stated, "In the short term, we will closely monitor economic, price, and financial developments, especially the Middle East situation. We will observe whether economic and price trends align with our forecasts and the associated risks. As core inflation approaches 2%, we need to be wary of the risk of price increases. We will adjust policy flexibly to ensure we do not fall behind the situation." After the meeting on Tuesday, the exchange rate of the Japanese yen against the US dollar remained around 160 yen to one dollar, as traders remained cautious of further intervention by Japanese authorities in the foreign exchange market. Investors may also be waiting for the results of the Federal Reserve meeting before taking action, as the market expects the Fed to move towards higher borrowing costs in the future. The European Central Bank already announced a rate hike last week. Chief strategist at Nomura Securities, Nakatoshi Morita, said, "As the US and Europe begin to raise rates, the Bank of Japan is likely to have no choice but to accelerate the pace of rate hikes beyond previous expectations in order to avoid falling further behind the curve." Speculation about a rate hike in June began to heat up after a divergence of opinions at the Bank of Japan's April meeting. Three officials voted in favor of a rate hike, opposing the decision to keep rates unchanged. Recently, some policy makers who supported the status quo at the April meeting have openly expressed their support for a rate hike. Two-thirds of economists surveyed believe the Bank of Japan's communication before the decision this week was "good" or "very good," with only 5% of respondents rating its communication as poor. Chief strategist at All Japan Asset Management, Chotaro Morita, said, "Decisions at future monetary policy meetings may become more important than ever and no longer just a matter of following a preset path of monetary policy normalization." "At the same time, the Bank of Japan will face greater pressure to explain in detail how it assesses economic and price trends when announcing policy decisions." The "Input Inflation" Challenge from the Middle East Conflict Despite the recent agreement between the US and Iran aimed at ending hostilities and reopening the Strait of Hormuz, the severe backlog in global maritime logistics continues to strain supply chains. Hundreds of merchant ships are still waiting in line for safe passage. For Japan, which highly depends on Middle Eastern oil and gas, the energy crisis has already brought about imminent price pressure. Data shows that wholesale prices in Japan surged by over 6% year-on-year in May, the fastest rate in three years; although its overall Consumer Price Index (CPI) in April was 1.4%, temporarily below the Bank's long-term target of 2%, the skyrocketing costs in industrial upstream have left the Bank of Japan with no excuse to maintain policy flexibility. The stark difference between the retail and wholesale fronts exposes the underlying weakness of demand in the Japanese economy - while businesses bear the burden of cost shocks from imported energy, they struggle to fully transfer the entire price increases to consumers. This is the internal dilemma of the rate hike decision - cost-driven inflation triggered by external energy shocks may not necessarily require an interest rate instrument to address, and rate hikes themselves may more likely suppress the already fragile domestic demand. The Bank of Japan forecasts that core CPI inflation will gradually rise, reaching a level consistent with the price target between the second half of the 2026 fiscal year and the 2027 fiscal year, but also admits that CPI growth rates may accelerate to significantly higher than 2%. Governor Kuroda stated on June 3 that he expects a sharp increase in year-on-year CPI, particularly concentrated in the 2026 fiscal year. Whether this "anticipated acceleration" is sufficient to support a faster pace of rate hikes is the key question the Bank needs to answer next. Furthermore, the Bank of Japan's decision to raise rates is also to stabilize the yen exchange rate, which is under pressure from other major currencies such as the US dollar and the euro. Even with a rate hike, Japan's rates are still lower compared to other major economies. For example, the current rates in the US and the UK are both above 3%. While a weaker yen boosts Japan's export competitiveness, it also exacerbates import inflation and puts pressure on the government's finances as subsidies are needed to mitigate the impact of rising prices. The Rate Hiking Path under Political Constraints It is worth noting that the market is still concerned about the Bank of Japan's slow rate hikes and vulnerability to political pressure. The most implicit and critical constraint that the Bank of Japan faces in raising rates comes from the political realm. Prime Minister Sanae Takashi continues the policy preference of "Abenomics," staunchly advocating for maintaining loose fiscal and monetary policy environments, believing that low rates and loose conditions are the only remedy to rescue the Japanese economy, and expresses clear opposition to rate hikes. The Takashi government's expansionary fiscal policy has put the Bank of Japan in a dilemma of "rate hikes leading to a debt crisis, no rate hikes exacerbating yen depreciation and input inflation." For the Takashi government, the priority is to curb rapid rate hikes, preventing fundamental shocks to the government debt rate nearing 250%. Several analysts point out that the Bank of Japan must seek a delicate balance between "avoiding angering the Takashi government" and "preventing slow action" in policy directions. This political pressure has already been reflected in the decision on bond purchases - the most direct effect of pausing the reduction of bond purchases is to suppress the rapid rise of long-term rates, creating a stable environment for debt financing. The Bank of Japan announced a pause in the reduction of bond purchases alongside the 25 basis point rate hike, maintaining the monthly purchase volume of Japanese government bonds at about 2 trillion yen starting from April 2027. This parallel approach of rate hikes and pausing bond reduction reflects the Bank's desire to suppress inflation and yen devaluation, while also considering the economic pressures it faces; objectively, this may lead to doubts about the Bank's policy independence. If the Bank of Japan seeks to accelerate the frequency and magnitude of rate hikes, resistance from the political sphere is likely to intensify. Therefore, the Bank of Japan is likely to adopt a slow pace of rate hikes every six months - which is currently the mainstream prediction given by most economists on the Bank of Japan's policy pace. The Bank of Japan also faces a delicate balancing act: raising rates may help lower inflation, but higher rates will also increase borrowing costs, adding to the expenses of the government and businesses. Jesper Koll, a Japanese economist, said, "After twenty years of deflation, Japan is now in an inflationary cycle. Emergency/crisis management monetary policy is no longer needed, and the Bank of Japan hopes to return to normal monetary policy."