Bank of Japan Expected to Hold Rates at 1.25% in October Meeting

A CNBC survey finds that all 16 respondents expect the Bank of Japan to leave the policy rate at 1.25% when Friday concludes a two-day meeting. The respondents expect a pause because the bank raised rates last month to the highest level in 31 years. All respondents expect the bank to prepare for another increase in December or January next year as domestic inflation and wages rise. CNBC surveyed 16 economists and analysts between October 14 and 26.

Lombard Odier senior macro strategist Homin Lee said macroeconomic conditions support further tightening. However, Lee said fragility in Japan's bond market could prevent sufficient agreement among policy board members for consecutive increases. Citi Research economist Sosuke Nakamura said inflation shows no clear acceleration sufficient to justify consecutive rate increases.

Japan's September core inflation, which excludes fresh food, reached 2.1% from a year earlier, the highest reading this year. A weak yen increased import costs, and elevated energy costs pushed prices higher despite government subsidies cushioning consumers against rising energy expenses. The latest government data show that inflation-adjusted wages increased 1.5% from a year earlier in August, the eighth consecutive monthly rise. The wage gains also signal the potential for inflation driven by wage growth. Finance Minister Satsuki Katayama reportedly told lawmakers last week that Japan was nearing sustained inflation driven by wage growth, while acknowledging that higher import costs also increased prices.

BNP Paribas Asset Management senior fixed income strategist Ryutaro Kimura said he would watch for a change in the bank's inflation assessment this week. Kimura said the statement could shift from "underlying CPI inflation has been approaching 2 percent" to "has reached 2 percent."

The CNBC survey finds that nine respondents expect the yen to trade at 157 to 158 per dollar over the next month. Respondents' three-month forecasts for the yen ranged more widely, from 150 to 160 per dollar. State Street Investment Management senior fixed income strategist Masahiko Loo said policy normalization, higher domestic yields and changing institutional flows should gradually narrow the interest-rate differential and attract capital back to Japan. However, Loo said elevated US yields should prevent the yen from strengthening steadily.

The yen appreciated against the dollar last week as investors sought safety during a sell-off in artificial intelligence stocks. Japan's government bond yields also declined last week because of demand for safer assets. Those movements reversed developments earlier in the month, when Prime Minister Sanae Takaichi's spending plans and a global bond sell-off pressured Japan's currency and government bonds.

The CNBC survey finds that nine respondents expect the benchmark 10-year Japanese government bond yield to reach 3% to 3.1% by year-end, compared with 2.809% currently. Seven respondents forecast the 30-year yield at 4% to 4.1%, compared with 3.829% as of Tuesday. Analysts expect the bank to resume tightening after an anticipated October pause. Credit Agricole chief Japan economist Takuji Aida said January is the likely date for the next increase, coinciding with the bank's quarterly economic and price outlook.

The CNBC survey finds that 13 respondents expect a terminal rate of 1.75% to 2% around mid-2027, marking the anticipated end of tightening. SOMPO Institute Plus senior economist Masato Koike said macroeconomic data place the policy rate closer to a neutral level of 2%, also the bank's inflation target. However, Koike expects increases to end around 1.75% because of Japan's economic conditions and the need to avoid excessive downward pressure on growth.