A recent Reuters poll indicates that 96% of economists expect the Bank of Japan (BOJ) to maintain its key interest rate at 0.50% during the September meeting. Additionally, 55% anticipate a rate increase to at least 0.75% in the fourth quarter, a drop from 63% previously.
The median forecast for the year-end interest rate remains at 0.75%, consistent with last month’s consensus. Of those surveyed, 76% do not foresee wage increases in next year’s spring negotiations surpassing this year’s 5.25% level, with the median estimate set at 4.80%.
Possibility of Rate Hike
Despite political instability and tariff issues, the possibility of another rate hike next year remains. Nonetheless, anticipated wage negotiations might present challenges if wage growth does not meet current projections.
The consensus is clear that the Bank of Japan will hold its key rate at 0.50% this month. Recent government data showed August core inflation eased slightly to 2.9%, giving the board plenty of reason to wait and see. For derivatives traders, this high certainty has compressed short-term volatility in the yen.
While a rate hike to 0.75% is still the base case for the fourth quarter, conviction is clearly dropping. This caution is amplified by the ongoing US-Japan trade talks, where potential tariffs remain a significant headwind for our export sector. Consequently, we see options markets pricing in more risk for year-end contracts.
Warning Sign for Sustained Hiking
The biggest warning sign for any sustained hiking cycle is the forecast for next spring’s wage growth to fall below this year’s levels. We know from the slow pivot away from negative rates back in 2024 that the central bank will not act aggressively without clear evidence of a wage-price spiral. This outlook should temper any long-term bullish bets on the yen.
