Anticipated Rate Increase by Bank of Japan This Week, CNBC Survey Finds

This week may see the Bank of Japan elevating its primary interest rate by 25 basis points, as deduced from a CNBC survey of economists.

Such an adjustment would elevate the key rate to 0.5%, marking its peak since 2008.

A considerable 18 of the 19 economists surveyed support the likelihood of a rate increase, attributing much of their foresight to a shift in the Bank of Japan's leadership's communication tone. This survey took place from January 15 to January 20.

Recent discussions by Governor Kazuo Ueda and Deputy Governor Ryozo Himino with business leaders hinted at the BOJ's inclination towards a rate hike. On January 16, Ueda noted the central bank's readiness to raise rates should the economy and price trends exhibit ongoing improvements, according to a Reuters report.

Himino mentioned the prospect of debating a rate increase at the forthcoming meeting, pointing out that it would be unusual for real interest rates to persist in the negative zone once deflationary pressures have been overcome.

The overall sentiment signals the easing of obstacles that blocked a rate hike previously, according to many CNBC-polled economists.

Nonetheless, a significant risk to this prediction is the unpredictability surrounding Donald Trump's administration and its prospective effects on global financial markets and Japan's economic standing.

Nomura Securities economist Uichiro Nozaki described Himino's address as a pivotal factor influencing their prediction for a rate increase.

He further stated that based on the statements of Himino and Ueda, it appears the BOJ is gaining conviction. Himino emphasized anticipating substantial wage growth by 2025 akin to expected figures in 2024.

Economic Context

Takesh Yamaguchi, leading Japan economist at Morgan Stanley MUFG Securities, reaffirmed his expectation for a rate rise, citing the leadership's enhanced optimism on wage growth projections for fiscal 2025 and uncertainty regarding the U.S. administrative transition.

Economists frequently referenced the yen's persistent depreciation as a contributing factor favoring a rate hike. Before Himino's January 14 address, the yen had dipped to a six-month low at 158.37.

Stefan Angrick, associate director at Moody's Analytics, noted the yen's significant weakening following the BOJ's choice not to proceed with a rate hike in December, compounded by a series of heightened inflation data, which makes the case for monetary policy action more compelling in January.

The anticipation around this week's potential rate increase has buoyed the yen, with its value appreciating by 1.24% in the past week.

LSEG data currently suggests a nearly 88% likelihood of a rate hike during the upcoming meeting.

Wage and Price Dynamics

The Bank of Japan aims to cultivate a 'virtuous cycle' of rising wages and prices, whereby increased wages would foster higher consumption and amplify prices.

This cycle is pivotal for achieving long-term growth in Japan's economy, stuck in stagnation since its asset bubble burst in the 1990s.

Several economic signals appear positive, with core inflation—excluding fresh food—aligning with or surpassing the BOJ's 2% objective consistently for several months.

Himino underscored the importance of monitoring wage increments for the upcoming fiscal year spanning from April 2025 to March 2026.

However, household spending data does not indicate significant enhancement, with expenditure trailing year-on-year almost continuously since March 2023, except for minor upticks in April and July 2024.

Sluggish consumer spending could signal weak demand, potentially hindering the BOJ's intent to establish a self-sustaining economic revival.