Bank of Japan is expected to hold rates this week — but stay hawkish: CNBC

The Bank of Japan is expected to keep the policy rate unchanged at 1.25% at the end of its two-day meeting on Friday, according to a CNBC survey, with the possibility of a hike very much alive in the coming months.

All 16 respondents expect the BOJ to stand pat, given the bank raised rates last month to their highest level in 31 years. All respondents said they expect the BOJ to set the stage for a rate hike in December or January next year, as domestic inflation and wages continue to rise.

Macroeconomic factors support the BOJ’s additional policy tightening, said Homin Lee, senior macro strategist at Lombard Odier. “But there may not be sufficient consensus in the policy board for successive rate hikes given the fragility in the domestic bond market,” he added.

Sosuke Nakamura, an economist at Citi Research, said he sees no clear signs of inflation accelerating to a degree that would justify consecutive rate hikes.

Japan’s core inflation, excluding fresh foods, for September rose 2.1% from a year earlier, reaching its highest this year as a weak yen raises import costs and elevated energy costs feed through to higher prices, even as government subsidies absorb rising costs of energy for consumers.

Japan’s inflation-adjusted wages rose for the eighth month in a row in August, climbing 1.5% from a year earlier, according to the most recent government data, signaling potential wage-growth-driven inflation as well.

Finance Minister Satsuki Katayama reportedly told lawmakers last week that Japan was “on the cusp of shifting to a period of sustained inflation driven by rising wages,” while acknowledging that higher import costs were also pushing up prices.