BOJ seen raising interest rates by December as weak yen fuels inflation risks

The Bank of Japan (BOJ) is expected to raise interest rates again by December, with a growing number of economists also seeing the possibility of an earlier move in October, according to a Reuters poll. The findings reflect mounting concerns that a weak yen and broadening inflationary pressures will require the central bank to continue its gradual policy tightening.

The Reuters survey, conducted between July 13 and July 21, found that 75 of 87 economists (86 per cent) expect the BOJ to raise its benchmark interest rate by 25 basis points to 1.25 per cent by the end of December, up from the current 1 per cent, which was set after the central bank's June rate hike to a three-decade high.

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Among respondents who specified the timing of the next move, more than half (53 per cent) forecast a December rate hike, while 35 per cent expect the BOJ to act as early as October.

Economists said persistent inflationary pressures, coupled with the yen's sharp depreciation, are strengthening the case for another increase in borrowing costs. The Japanese currency recently weakened to 163.24 per US dollar, its lowest level since 1986, adding to imported inflation through higher energy and commodity prices.

"The pace of rate hikes, which until now has been roughly once every six months, may accelerate somewhat due to the need to counter inflationary and yen-selling pressure," Kazutaka Maeda, senior economist at Meiji Yasuda Research Institute, told Reuters.

The poll's median forecast expects Japan's core inflation to rise into the mid-2 per cent range in the fourth quarter of 2026, driven largely by higher oil prices following the Iran conflict.

However, economists cautioned that aggressive monetary tightening could weigh on Japan's fragile economic recovery by increasing borrowing costs for businesses and households.

Looking beyond this year, around 70 per cent of economists expect the BOJ's policy rate to reach at least 1.5 per cent by the second quarter of 2027, although views on the terminal rate remain divided, ranging between 1.25 per cent and 2 per cent.

The survey also highlighted growing concerns over Japan's public finances. Nearly 58 per cent of economists said they were either "very" or "somewhat" concerned about rising debt-servicing costs over the next two to three years as government bond yields continue to climb.

At the same time, almost 80 per cent of respondents said the yen's exchange rate around 160 per US dollar is weaker than justified by Japan's economic fundamentals, underscoring the challenges facing policymakers as they balance inflation control with economic growth.