By Satoshi Sugiyama
TOKYO, July 23 (Reuters) – The Bank of Japan will raise its interest rate again by end-December and possibly as soon as October, according to a majority of economists in a Reuters poll, keeping further rate rises in view through next year.
That outlook underscores the bind Japan’s central bank is in: if it keeps rates low it could intensify yen-driven inflation, but raising them too quickly risks aggravating debt-service concerns and slowing a fragile economic recovery.
Broadening price pressures and a weak yen are nudging the BOJ to keep raising rates very gradually, about once every six months. Prime Minister Sanae Takaichi has signalled her wariness of rate rises.
In the July 13-21 survey 95%, or 83 of 87 economists, expected the BOJ to leave rates unchanged this quarter. The central bank raised rates to a three-decade high of 1% in June.
By end-December, 86%, or 75 of 87 economists, forecast a 25-basis-point rate hike to 1.25%, up slightly from 79% in a June survey. Of the 51 respondents who specified a month, 53% chose December, 35% picked October and 8% said January or later.
“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,” said Kazutaka Maeda, senior economist at Meiji Yasuda Research Institute, who expects an October rate hike.
The yen weakened to 163.24 per dollar on Tuesday in U.S. trading, its weakest level since December 1986, as higher oil prices and rising U.S. Treasury yields boosted the greenback.
Although Japan’s core inflation has remained below the BOJ’s 2% target in the last four months, the poll median forecast showed it rising into the mid-2% range by Q4 on higher oil prices following the Iran war.
Atsushi Takeda, chief economist at Itochu Research Institute, who forecast the next hike in December, said an early additional rate hike could be an option to curb inflationary pressure from the weak yen.
Still, such a move could heighten expectations among companies’ borrowing costs will rise further, dampening their appetite for investment and risking a derailment of the economic recovery, he said.
Beyond this year, 70% of economists expected the policy rate to reach at least 1.50% by end-Q2 2027. A slim majority saw 1.50% as the BOJ’s terminal rate, with forecasts ranging from 1.25% to 2.00%.
Nearly three-quarters of respondents, or 23 of 32, said the BOJ was not moving too slowly on rate hikes, citing underlying inflation yet to stabilise at 2% and lingering downside risks from the Middle East war.
WORRIES OVER COST OF DEBT
Japan’s low interest rates relative to its peers and concerns over the country’s finances have steadily weakened the yen.
Nearly 80% of economists, or 23 of 29, said dollar/yen around the 160 level was too weak relative to Japan’s economic fundamentals.
The poll also showed 58% of economists were “very” or “somewhat” concerned about debt-servicing costs over the next two to three years as Japanese government bond yields climbed to multi-decade highs.
A draft government economic blueprint saying it was “very important for monetary policy to be guided appropriately to achieve a stronger economy” sparked a selloff in Japanese government bonds by fuelling speculation the government could pressure the BOJ to keep rates low.
It was later revised to reaffirm the central bank’s independence, while Takaichi denied any link to the market reaction.
(Other stories from the Reuters global economic poll)
(Reporting by Satoshi Sugiyama; Polling by Susobhan Sarkar and Renusri K; Editing by Vivek Mishra, Ross Finley and Sam Holmes)
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