Bank of Japan is expected to hold rates this week — but stay hawkish: CNBC survey

The BOJ is expected to leave its policy rate at 1.25% after its two-day meeting. This would be a pause, not necessarily a change in direction. A central bank can remain hawkish by warning that rates may rise later if inflation and wages continue strengthening.

The survey provides a clear example. All 16 respondents expect no move this week, yet all also expect the BOJ to prepare markets for a hike in December or January. The bank may say its underlying inflation has reached the 2% target, rather than merely approaching it. That wording would signal greater confidence in inflation’s persistence.

The pause reflects caution about Japan’s fragile domestic bond market and limited support for consecutive hikes. Still, rising core inflation, stronger real wages, and expected future tightening keep the BOJ’s overall stance firm. Markets will watch its language as closely as the unchanged rate.

A central-bank policy rate is the benchmark interest rate used to steer financial conditions. It does not set every household or business rate directly. Instead, it influences the rates banks charge borrowers and offer savers, as well as market expectations.

When the rate rises, loans, mortgages, and corporate financing typically become more expensive. Households may delay purchases, while companies may reduce investment. Savers can receive better returns, which may also encourage saving. These effects can slow demand and help contain inflation. When the rate falls, cheaper credit can support spending and investment, while saving becomes less attractive.

For Japan, the BOJ is weighing these effects against rising prices and wages. Its rate is already 1.25%, the highest level in 31 years, according to the article. Further increases could restrain inflation, but officials also want to avoid excessive downward pressure on economic growth.

Japan’s current policy rate is 1.25%, following a rate increase last month that brought it to the highest level in 31 years. The rate is still below the level many economists identify as neutral, but the BOJ is already tightening policy compared with earlier periods.

Inflation has also moved above the BOJ’s 2% target on the measure cited in the article. Core inflation, which excludes fresh food, rose 2.1% in September from a year earlier. Import costs, a weak yen, and energy prices helped push prices higher. Government energy subsidies partly absorbed those costs for consumers.

The eventual destination is uncertain. Thirteen of 16 respondents expect a terminal rate between 1.75% and 2% around mid-2027. Masato Koike expects the BOJ to stop near 1.75%, because Japan’s economy may not withstand excessive pressure on growth.

Inflation driven by domestic wages is more persistent than a temporary price increase caused only by imported goods. If workers receive higher real pay, households may have more ability to spend. Businesses may then raise prices to cover higher labor costs, creating a wage-price cycle that can sustain inflation.

Japan’s inflation-adjusted wages rose 1.5% from a year earlier in August. That was the eighth consecutive monthly increase. The pattern suggests wage growth is becoming a meaningful source of price pressure, rather than prices rising solely because imported energy and goods became more expensive. Finance Minister Satsuki Katayama described Japan as nearing sustained inflation driven by rising wages.

The evidence is not conclusive. September core inflation reached 2.1%, but the article also points to a weak yen and elevated energy costs. Economist Sosuke Nakamura sees no clear acceleration that would justify consecutive hikes. The BOJ must judge how durable the wage effect will be.

A higher BOJ rate would make Japanese assets more attractive relative to some overseas alternatives. That could narrow the interest-rate gap and pull capital back toward Japan, supporting the yen. Japanese government bond yields could also rise as markets price tighter policy and higher future short-term rates.

The article gives several clues. Masahiko Loo says BOJ normalization, higher domestic yields, and changing institutional flows should gradually narrow the rate differential. Nine respondents expect the benchmark 10-year JGB yield to reach 3% to 3.1% by year-end, compared with 2.809% currently. Seven expect the 30-year yield to reach 4% to 4.1%.

For households, higher market rates can feed into more expensive mortgages and other borrowing. The yen’s rise may not be smooth. Elevated U.S. yields could prevent a straight-line rally, while stronger borrowing costs could reduce spending and investment in Japan.

Central banks do not normally raise rates automatically at every meeting. They pause to observe how earlier increases affect inflation, wages, markets, and economic activity. A pause can also prevent unnecessary damage when the evidence is mixed or financial markets are vulnerable.

Japan’s situation shows both reasons for caution. Homin Lee said macroeconomic conditions support more tightening, but questioned whether the policy board has enough agreement for successive hikes because of fragility in the domestic bond market. Sosuke Nakamura sees no clear inflation acceleration that would justify consecutive increases. The BOJ has already lifted rates to 1.25%.

The expected pause therefore does not end normalization. All survey respondents still expect the BOJ to prepare for a December or January hike. Takuji Aida sees January as likely, when the BOJ releases its quarterly outlook. Officials must balance rising wages and prices against financial stability and growth.

A neutral interest rate is an estimated level that leaves the economy broadly balanced. It neither encourages extra spending nor deliberately slows demand. Because it cannot be observed precisely, economists infer it from economic conditions, inflation, and growth. The article identifies about 2% as Japan’s neutral level.

Comparing the policy rate with neutral helps the BOJ judge its stance. A rate below neutral may still support demand, while a rate near or above neutral is more likely to restrain borrowing and spending. If inflation is persistent, moving toward neutral can help contain price pressure. If growth is fragile, going too far could cause unnecessary weakness.

Masato Koike says Japan’s policy rate is closer to the neutral level of 2%, which is also the BOJ’s inflation target. He expects the bank to stop around 1.75% to avoid excessive downward pressure on growth. That explains why future hikes may be gradual rather than automatic.