Economists Predict Another BOJ Rate Hike: What It Means for Japan's Economy

Japan's economic landscape is buzzing with anticipation as a recent Reuters poll reveals a strong consensus among economists: the Bank of Japan (BOJ) is highly likely to raise its interest rate again by the fourth quarter of 2024. This follows the BOJ's historic move in March, which saw the central bank abandon its negative interest rate policy – a first since 2007 – signaling a significant shift away from decades of ultra-loose monetary settings.

The survey, conducted between May 7 and 16, highlighted that 34 out of 46 economists, accounting for a substantial 74%, foresee a rate hike between October and December of this year.

While a smaller contingent of eight economists anticipates a move even sooner, in the third quarter, the overall sentiment points towards a continued tightening of monetary policy as the year progresses.

Looking further ahead, the majority of experts predict that the BOJ's policy rate, currently in the 0-0.1% range, will reach 0.25% by the end of 2024.

This trajectory is expected to continue into 2025, with forecasts suggesting the rate could climb to 0.5% by the close of that year. This gradual but firm approach indicates the BOJ's cautious yet determined path towards normalizing monetary policy.

The primary catalysts for these anticipated rate increases are Japan's persistent inflation and robust wage growth.

Despite past struggles to achieve its 2% inflation target sustainably, recent economic indicators show core consumer price inflation (excluding fresh food) is projected to hit 2.6% for fiscal year 2024. Although this is expected to ease slightly to 1.9% in fiscal year 2025, the consistent above-target inflation and significant wage increases across various sectors are providing the BOJ with the crucial evidence it needs that inflation is becoming demand-driven and sustainable.

While the weak yen has been a point of concern, with its depreciation against major currencies raising import costs and contributing to inflationary pressures, economists largely believe that the BOJ will prioritize fundamental economic conditions rather than currency fluctuations when making policy decisions.

Although the government may intervene to support the yen if it falls too sharply, monetary policy is expected to remain focused on achieving a stable 2% inflation target, underpinned by a virtuous cycle of wages and prices.

Looking beyond interest rates, the poll also offered insights into broader economic indicators.

Japan's economy is expected to expand by 0.9% in the current fiscal year, a slight revision down from previous estimates, and then accelerate to 1.1% in fiscal year 2025. This modest growth, coupled with the BOJ's measured approach, suggests a deliberate and strategic navigation of Japan's economic future, moving away from an era of deflation and towards sustained, healthy growth.