BOJ set to hike interest rates in December, but decision on knife-edge - Reuters poll

TOKYO: The Bank of Japan will raise interest rates at its upcoming December meeting, according to a slim majority of economists in a Reuters poll, pushing through with its aim of normalising monetary policy, backed by the yen’s recent decline.

Prime Minister Sanae Takaichi, a proponent of expansionary fiscal and monetary policy who came into office a month ago, has urged the BOJ to cooperate with government efforts to reflate the economy and to tread cautiously in hiking rates.

Still, economists say the conditions for a rate hike are falling into place, with the yen’s depreciation strengthening the case. The yen this week has tumbled to a 10-month low against the dollar and the weakest level ever against the euro.

The BOJ last raised rates by 25 basis points in January.

In a November 11-18 poll, 53% of economists, or 43 of 81, expected the Japanese central bank to raise short-term interest rates to 0.75% from 0.50% at its December 18-19 policy meeting.

All 69 respondents who provided forecasts predicted borrowing costs would reach at least 0.75% by the end of March.

“With the yen sliding, there are also concerns about upside pressure on prices through imported inflation,” said Takeshi Minami, chief economist at Norinchukin Research. “We expect an early rate hike, positioned as a fine-tuning of the degree of monetary easing.”

The yen has been by far the worst-performing G10 currency in recent months, raising the prospect of Japanese authorities intervening to lend it some support.

Although Japan logged its first economic contraction in six quarters for July-September, that was largely due to special factors, and underlying private demand remained firm, Minami said.

The median prediction for the end-2026 rate was 1.00%, unchanged from last month’s survey.

After its last policy meeting in October, BOJ Governor Kazuo Ueda suggested the initial momentum of next spring’s annual labour-management wage negotiations was key to rate hike timing.

If wage momentum is confirmed and coordination with the Takaichi administration is smooth, a December hike appears very likely, said Harumi Taguchi, principal economist at S&P Global Market Intelligence.

In the poll, 81% of economists who answered an extra question, 25 of 31, said they did not think the rate of pay increase in next year’s labour-management negotiations would exceed this year’s 5.25%.

That was up from 76% in September.

The median of 28 economists who offered their view on the rate was 4.9%, compared with September’s 4.8%.

The pace of wage increases will remain high in 2026 backed by strong corporate earnings, said Jun Inoue, senior economist at Mizuho Research & Technologies.

“However, with manufacturing profits likely to come in below expectations, overall corporate earnings are seen dipping slightly, and therefore the scale of wage hikes in 2026 is expected to slow compared with 2025,” he said.