When will the Bank of Japan raise interest rates next? Economists predict it is most likely in December, but market speculation is on October.

The Bank of Japan is facing a new policy game regarding future interest rate hikes. The latest survey shows that despite ongoing inflationary pressures and significant depreciation of the yen, most economists still expect the Bank of Japan to not rush to tighten its policy further, with the next rate hike likely to occur in December of this year. According to a survey of 52 economists conducted by an institution, 50% of respondents believe that the Bank of Japan's next increase in the benchmark interest rate is most likely to occur in December, while 40% of economists forecast action in October. In contrast, market pricing is significantly more aggressive, with the Japanese interest rate futures market showing that investors expect an almost 80% probability of a rate hike by the Bank of Japan in October. The High Market government's inclination towards loose policies becomes the biggest uncertainty factor for interest rate hikes. The survey shows that 59% of economists believe that the influence of the High Market government on the normalization speed of monetary policy will be a significant obstacle to further interest rate increases by the Bank of Japan. High Market Soen has long been in favor of supporting loose fiscal and monetary environments, with economic policy proposals including expanding government spending, supporting industry investments, and avoiding prematurely tightening financial conditions. Some economists believe that although the Bank of Japan has already entered an interest rate hike cycle, the government's concerns about the cost of debt may limit the speed of its policy adjustments. The Bank of Japan has previously emphasized the independence of its monetary policy. To allay concerns in the market about "government interference in central bank independence," the Japanese government, in the annual economic and fiscal policy outline recently approved, specifically revised and added wording to "respect the independence of the Bank of Japan," attempting to alleviate market concerns about government intervention in central bank decisions. However, the government's stance has not completely dispelled market concerns. About two-thirds of the surveyed economists explicitly stated that they do not believe that the government's wording change in the outline implies it will abandon the independent decision-making of the central bank. Nevertheless, the survey shows that about two-thirds of economists still do not believe that this adjustment means the government will not attempt to influence the Bank of Japan in the future. Tsuyoshi Ueno, Chief Economist at NLI Research Institute, stated, "Due to the divergence between the Bank of Japan and the government on the speed of interest rate hikes, the hurdle for hiking early remains high." Divergence between the market and economists The gap in expectations between economists and market participants in this round of monetary policy cycles is remarkably rare. Market participants are more aggressive than economists, with a report released after the survey suggesting that the yen's continued weakness has exacerbated the risk of rising inflation, leading Bank of Japan officials to maintain an open attitude towards raising rates faster than economists generally expected. Officials realize that many observers anticipate the Bank of Japan to act approximately every six months, but they are willing to raise rates earlier if necessary, without a predetermined specific path. Derivative market pricing indicates that traders expect an almost 80% probability of a rate hike by the Bank of Japan before October. Officials stated that it is particularly important to carefully examine additional price upside risks because the potential inflation rate is finally very close to the 2% target set by the Bank of Japan over 13 years ago. As potential inflation rates approach 2%, some officials believe that the Bank of Japan's task is changing - the focus of policymakers is gradually shifting from pushing for price increases to ensuring stable inflation anchored around the target level. In addition, officials have seen increasing evidence of entrenched inflation - companies are passing on cost increases to customers faster than before, reflecting a shift in pricing behavior since the outbreak of the Iranian conflict. Yen plunges below 163 and oil price shocks: Rising inflation risks may force Bank of Japan to act early Despite political resistance, the Bank of Japan may still be forced to "press the rate hike button early" due to pressure from the exchange rate and Middle East tensions. At the interest rate meeting on June 16, the Bank of Japan raised the benchmark interest rate to a historic high of 1.0% without clear opposition from the government. 65% of surveyed bank observers pointed out that it was because the yen was weakening continuously and import costs were soaring at the time that the High Market government had to passively accept this rate hike decision. However, in recent weeks, geopolitical risks have reignited the currency and commodity markets: the yen has fallen below historical lows, the escalation of the US-Iran conflict has pushed international oil prices sharply higher, and the yen-dollar exchange rate previously fell below the 163 level, hitting its lowest level since 1986. Imported inflation has intensified, as nearly all of Japan's energy and over half of its food needs rely on imports, and the weakened yen has directly increased pressure on the costs of importing oil and commodities. In this context, economists' attitudes towards "earlier-than-expected rate hikes" have softened. When asked about the earliest possible time for the next policy adjustment, 37% of experts chose September of this year (higher than the 23% after the June meeting). Kento Minami, an economist at Daiwa Securities, stated, "The continuous depreciation of the yen is still driving up prices, and the risks of inflation remain high. The Bank of Japan is shifting the focus of its rate decisions towards addressing the risks of rising inflation, making the timing of the next rate hike earlier than previously expected." It is worth noting that about 65% of Bank of Japan observers believe that it was the continuous depreciation of the yen that forced High Market Soen to accept the rate hike on June 16 - when the Bank of Japan raised the benchmark interest rate to 1%, hitting a new high in 31 years. The game between the Japanese government and the central bank: from economic blueprints to bond market turmoil The tense relationship between the High Market Soen government and the Bank of Japan was laid bare in the annual economic and fiscal policy operation guidelines finalized on July 21. The early draft called for the implementation of monetary policies to "boost private demand," but this wording was deleted. After causing market turmoil, the relevant content was further revised to clarify that the central bank's policy was aimed at "achieving stable price increases." The final version of the outline retained the wording urging the central bank to align its policies with the government while adding a footnote citing legal provisions protecting the independence of the central bank. However, market concerns have not dissipated. The previous version of the draft had raised concerns that policy normalization might be delayed, briefly pushing the yield on the benchmark 10-year Japanese government bond to its highest level in thirty years. In mid-July, the yield on the 10-year Japanese bond rose to 2.9%, hitting the highest level since September 1996. As of July 23, the 10-year yield remained around 2.77%. Eugene Leow, Senior Interest Rate Strategist at DBS Group Research, pointed out that since the beginning of 2026, the spread between one-year USD rates and one-year JPY rates has continued to widen. Investors have shifted their expectations from rate cuts by the Federal Reserve to rate hikes, while the adjustment speed of Japanese rates remains much more moderate. The US-Japan interest rate spread currently maintains a huge gap of about 250 to 275 basis points. July 31 Meeting: Staying put has become a certainty, focus turns to the outlook report It is widely expected that the Bank of Japan will maintain its policy rate at 1.0% at the monetary policy meeting on July 31. As Governor Haruhiko Kuroda was absent from the last meeting due to illness, this press conference will be the first opportunity for the public to assess his policy stance directly. Yusuke Matsuo, economist at Mizuho Securities, predicts that Kuroda will reiterate the stance towards further rate hikes at the upcoming press conference next week, but such statements are unlikely to reverse the weak trend of the yen. "The market has already largely priced in expectations of a rate hike every six months, so mere statements like these are unlikely to significantly boost the yen exchange rate. Given the market's expectation for the central bank to specify the timing and magnitude of the next rate hike, any stance interpreted as dovish may exacerbate the yen's weakness in an environment of overall dollar strength." At the upcoming policy meeting, the Bank of Japan's latest quarterly economic outlook forecast will be the core basis for market judgment on interest rate trends. According to the median forecast of surveyed economists: 2026 inflation forecast: slightly revised down from the previous estimate of 2.8% to 2.6%. 2026 actual GDP growth forecast: revised up from the preceding estimate to 0.7%. Can the pace of rate hikes every six months continue? The Bank of Japan is facing an almost unsolvable dilemma: maintaining low interest rates may exacerbate inflationary pressure brought on by the weak yen, but hiking rates too quickly could worsen debt servicing pressures and weigh down an already fragile economic recovery. The consensus among economists is to hike rates about every six months. However, the yen hovering around 163, the heightened oil price due to the US-Iran conflict, and the continuous widening of the US-Japan interest rate spread are constantly challenging the sustainability of this pace. The market has already given its answer: an 83% probability of action before October. The Bank of Japan officials' statement of being "open to faster rate hikes" provides more fuel to this bet. Minami stated, "The Bank of Japan is shifting the focus of its rate decisions towards managing the risks of rising inflation." When inflation risks collide with political resistance, the Bank of Japan's next rate hike - whether in October or December - will be one of the most important macro narratives in the global capital market. (Translation by Google Translate, with some manual revision)