BOJ Rate Hike Expectations Surge After Trade Agreement Announcement

Increased Expectations for a Rate Hike in Japan

Following former US President Donald Trump's announcement of trade agreements with multiple countries, including Japan, thereby increasing trade transparency, Bank of Japan (BOJ) watchers have advanced their forecasts for the timing of the country's next interest rate increase. A foreign media survey of 45 economists revealed that approximately 42% expect the BOJ to take action in October, a significant jump from the 32% in the previous survey. The last consultation of analysts' opinions was prior to the US-Japan trade agreement announcement on July 22 and before the BOJ's policy decision last week.

The number of people predicting a rate hike in January of next year decreased slightly to one-third, while those expecting a December rate hike doubled to 11%. No one viewed the next meeting in September as the base case scenario, but under a risk scenario, about a quarter indicated that a rate hike could come as early as next month. Approximately 60% believe that the next rate hike could occur as early as October.

These results suggest that even with BOJ Governor Kazuo Ueda signaling caution in his remarks last Thursday, many observers still believe that the moment for the next upward adjustment of borrowing costs is increasingly near. Analysts pointed to the BOJ's larger-than-expected upward revision of its inflation forecasts and the enhancement of its balance of risks view as evidence that the bank is moving toward a rate hike.

Expert Opinions on the BOJ's Future Direction

Kento Minami, Senior Economist at Daiwa Securities, wrote in his survey response: "This meeting has laid the groundwork for the next rate hike. Considering food prices and the upside risks from potential yen weakness, once the resilience of corporate activities is confirmed, this year's situation is suitable for taking action again."

In its quarterly outlook report released last Thursday, the BOJ significantly raised its consumer price forecast for the current fiscal year from 2.2% to 2.7%. Whereas the bank had only seen downside risks three months ago, it now views price risks as broadly balanced.

Nevertheless, the hawkish signals in the report were tempered in Ueda's press conference after the meeting. The governor repeatedly emphasized that uncertainties remain high despite being reduced from before, and stated that there is no immediate urgency to raise interest rates, deeming the risk of "falling behind the curve" on inflation to be low.

Naka Matsuzawa, Chief Strategist at Nomura Securities, concluded that Ueda's press conference and the BOJ's statement were generally hawkish, partly because denying the possibility of "falling behind the curve" is natural for a central bank governor, as being in that situation is taboo for the governor.

Impact of Yen Weakness on BOJ Policy

Approximately 49% of surveyed economists thought that Ueda's comments at the press conference were neutral, while 44% thought they leaned dovish, and only 5% thought his comments were hawkish. These comments led the yen to fall below the key psychological level of 150 against the US dollar last Friday, reaching its lowest level since March. In the past, yen weakness has played a significant role in pushing the BOJ toward a policy shift, and analysts say the same thing could happen again this time.

Approximately 44% said that the possibility of the yen becoming a key factor in pushing the BOJ to raise interest rates again is increasing, while 35% believe that there is no such possibility. About one-fifth said it was difficult to say.

Takeshi Yamaguchi, Chief Japan Economist at Morgan Stanley Mitsubishi UFJ Securities, said: "If there is a sharp depreciation of the yen, there is a risk scenario that the BOJ may choose to raise interest rates early, while emphasizing the upward trend of core inflation."

Challenges Facing the BOJ

In addition to the uncertain economic pressures from tariffs and yen weakness, many analysts also point out that political uncertainty is a potential obstacle for the central bank in guiding monetary policy.

Japanese Prime Minister Shigeru Ishiba suffered a historic defeat in the July 20th Upper House election, and his ruling coalition lost its majority in both houses of parliament, and he is facing calls to resign.

Approximately 71% of surveyed economists said that if Shigeru Ishiba were replaced by a proponent of monetary easing, the policy board led by Kazuo Ueda might not be able to raise interest rates this year, while 19% believe that this is not the case.

Since Kazuo Ueda has repeatedly stated that he wants to analyze data broadly and carefully before considering the next interest rate hike, some BOJ watchers doubt whether the central bank will be able to gather enough data this year to justify adjusting interest rates again.

Shigeto Nagai, former head of the BOJ's International Department and current head of Oxford Economics Japan, said: "Even if the impact of tariffs is ultimately smaller than expected, it will take time to confirm it in the data. Another rate hike this year is impossible."