Economists: Bank of Japan has the highest probability of raising interest rates in July; yen depreciation may force earlier action.

According to Mars Finance, a recent Bloomberg survey of 52 economists on January 16th shows that exchange rate movements are becoming a key variable influencing the Bank of Japan's (BOJ) policy decisions. Against the backdrop of a continued weakening yen and rising inflationary pressures, market expectations for an earlier-than-expected interest rate hike by the BOJ are rising. The survey shows that all respondents unanimously expect the BOJ to maintain its benchmark interest rate at 0.75% at its policy meeting on January 22-23. Regarding the timing of the next rate hike, July is the most prevalent expectation, supported by 48% of economists; 17% believe a rate hike may occur in April or June. Economists generally expect the BOJ to maintain a semi-annual rate hike pace in the future. However, if the yen continues to depreciate and pushes up inflation expectations, the central bank may be forced to accelerate its actions. Junki Iwahashi, an economist at Sumitomo Mitsui Trust Bank, pointed out that if the USD/JPY exchange rate falls below the 160 mark, the timetable for rate hikes may be significantly brought forward. Currently, the yen exchange rate is hovering around 158.5, close to the multi-decade low reached in July 2024. In the survey, three-quarters of respondents believed that the risk of a weaker yen forcing the Bank of Japan to raise interest rates sooner is increasing. Regarding the interest rate path, economists' median forecast for the "terminal interest rate" in this rate hike cycle has been revised upward to 1.5%, the highest level since the survey began in late 2023. Furthermore, most respondents believe that the key focus of next week's meeting will be the Bank of Japan's updated quarterly economic outlook report, which for the first time includes the economic stimulus plan launched by the Sanae Takaichi government, potentially providing important signals for the pace of subsequent interest rate hikes.