Economists: Bank of Japan Most Likely to Raise Interest Rates in July, Yen Depreciation May Force Early Action

According to a survey by Bloomberg of 52 economists, exchange rate trends are becoming a key variable influencing the Bank of Japan's policy decisions. With the yen weakening and inflation pressures rising, market expectations for an early interest rate hike by the Bank of Japan are increasing. The survey shows that all respondents unanimously expect the Bank of Japan to maintain its benchmark interest rate at 0.75% at the policy meeting on January 22-23. The most mainstream expectation for the next rate hike timing is July, supported by 48% of economists, while 17% each believe it may happen in April or June. Economists generally predict that the Bank of Japan's future rate hikes will occur every six months. However, if the yen continues to depreciate and raise inflation expectations, the Bank may be forced to act sooner. If the USD/JPY falls below the 160 level, the rate hike schedule could be significantly accelerated. Currently, the yen exchange rate is hovering around 158.5, close to the multi-decade low set in July 2024. Three-quarters of respondents in the survey believe that the risk of yen weakness forcing the Bank of Japan to raise rates early is increasing. In terms of the terminal rate for this rate hike cycle, economists' median forecast has been raised to 1.5%, the highest level since the survey began in late 2023. Additionally, most respondents believe that the key focus of the upcoming meeting will be the Bank of Japan's updated quarterly economic outlook report, which for the first time includes the economic stimulus plan introduced by the government, and may signal important cues for the pace of future rate hikes.

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