Bank of Japan Poised to Hold at 1.25% This Week, Survey Finds

The Bank of Japan is set to conclude its two-day meeting Friday with the policy rate unchanged at 1.25%, according to a CNBC survey of economists and analysts conducted Oct. 14 through Oct. 26. All 16 respondents said the central bank will stand pat this week, while pointing to a possible rate hike in December or January. The survey comes after the BOJ raised rates last month to their highest level in 31 years.

The central bank is also expected to signal that its 2% underlying inflation target has been met, according to reports by Reuters and The Japan Times. Kimura, a senior fixed income strategist at BNP Paribas Asset Management, said he is watching whether the monetary policy statement shifts from saying underlying CPI inflation has been approaching 2% to stating it has reached 2%. Macroeconomic data supports additional tightening, but Homin Lee, a senior macro strategist at Lombard Odier, said there may not be sufficient consensus on the policy board for successive rate hikes given fragility in the domestic bond market.

Japan's core inflation, excluding fresh foods, rose 2.1% in September from a year earlier, the highest level this year, as a weak yen pushed up import costs and energy prices fed through to consumer prices. Inflation-adjusted wages rose 1.5% year over year in August, the eighth consecutive monthly increase. Finance Minister Satsuki Katayama told lawmakers last week that Japan was "on the cusp of shifting to a period of sustained inflation driven by rising wages," while acknowledging that higher import costs were also pushing prices up.

Analysts remain divided on the timing and pace of further tightening. Sosuke Nakamura, an economist at Citi Research, said he sees no clear signs of inflation accelerating enough to justify consecutive rate hikes. Takuji Aida, chief Japan economist at Credit Agricole, said the next hike is likely to come in January, when the BOJ releases its quarterly outlook report. Thirteen respondents expect the terminal rate to reach 1.75% to 2% by around mid-2027. Masato Koike, a senior economist at SOMPO Institute Plus, said he expects the BOJ to stop raising rates at around 1.75% to avoid excessive downward pressure on growth.

Forecasts on Japanese government bonds point higher. Nine respondents expect the benchmark 10-year JGB yield to sit between 3% and 3.1% by year end, up from 2.809%. Seven respondents see the 30-year JGB yield reaching 4% to 4.1%, from 3.829% as of Tuesday. On currencies, nine respondents expect the yen to trade between 157 and 158 against the dollar over the next month, while three-month targets ranged from 150 to 160.

The yen strengthened against the dollar and Japanese government bond yields fell last week on safe-haven demand during a sell-off in AI stocks. That reversed an earlier trend, when Prime Minister Sanae Takaichi's spending plans and a global bond sell-off pressured those assets. Masahiko Loo, a senior fixed income strategist at State Street Investment Management, said BOJ normalization, higher domestic yields and shifting institutional flows should gradually narrow the rate differential, though elevated U.S. yields would prevent a straight-line yen rally.

The BOJ's next scheduled policy decision comes at the close of its two-day meeting Friday. The survey was conducted among 16 economists and analysts from Oct. 14 to Oct. 26.