The Bank of Japan is now widely expected to raise its benchmark interest rate to 1.25% at its September 17-18 meeting, after a Reuters poll of economists showed a dramatic shift in expectations over the past month.
A survey conducted between August 17 and 24 found that 57% of economists now anticipate a rate hike to 1.25% next month, a sharp reversal from just 5% who held that view in July's poll. The shift marks one of the most rapid adjustments in BOJ rate expectations in recent memory, and it comes as Tokyo inflation data strengthens the case for further tightening.
Tokyo CPI Data Reinforces Tightening Case
Tokyo core CPI, which excludes fresh food, rose 1.8% year on year in August, beating the median market forecast of 1.7% and up from 1.7% in July. The core-core index, which strips out both fresh food and fuel and serves as the BOJ's preferred gauge of underlying trend inflation, hit 2.0% — reaching the central bank's target for the first time in the current cycle. Headline Tokyo CPI came in at 1.9%, matching forecasts.
Because Tokyo's inflation data typically leads the nationwide trend by several weeks, the release is closely watched as an early signal of where broader Japanese consumer prices are heading. The acceleration arrives at a pivotal moment for the BOJ, which raised rates to a 31-year high of 1% in June and held steady in July while issuing its strongest language yet on mounting inflation risk.
Wholesale inflation spiked to 7.2% year on year in July, pointing to further Middle East-related cost pressures still filtering through the pricing chain with a lag. Analysts say this jump suggests upward pressure on consumer prices may persist in the months ahead, even before accounting for any additional shocks.
Terminal Rate Projections Rise Sharply
The shift in expectations extends well beyond the September meeting. Nearly two thirds of the 54 analysts who answered a related question now expect the policy rate to reach at least 1.50% by the end of March 2027 — three months sooner than projected in the July poll. Around 60% expect rates to hit at least 1.75% by the third quarter of 2027. Among a smaller group asked specifically about the terminal rate, half now see 1.75% as the eventual peak, up from just 19% a month earlier. The proportion expecting a terminal rate of 2% or higher rose to 36% from 23%.
JPMorgan Securities chief Japan economist Ayako Fujita warned that with a September hike already largely priced into markets, an early policy adjustment has become unavoidable, adding that delaying the move risks destabilising markets that have already positioned for it.
Yen Intervention Deemed Ineffective, Takaichi Fiscal Policy Cited
Behind the faster tightening path lies persistent yen weakness that has proven resistant to policy intervention. Japan and the United States conducted a rare joint currency intervention last month after the yen fell to 40-year lows, an effort aimed at containing a selloff that had begun spilling over into US Treasury yields.
More than two thirds of economists surveyed — 18 of 26 — described that intervention as largely or entirely ineffective, with many characterising it as having only delayed rather than resolved the currency's underlying weakness. Fiscal policy under Prime Minister Sanae Takaichi was identified as a significant contributing factor, with 89% of economists — 25 of 28 — saying her government's approach is adding to pressure on the yen. Concerns centre on how planned tax cuts, including reductions on food items, will be funded.
Nomura Securities chief economist Kyohei Morita said the fiscal policy raises inflation expectations and intensifies concerns that the BOJ is falling behind the curve, cautioning that a consumption tax cut implemented without clear funding could accelerate yen depreciation further, including through foreign investors selling Japanese government bonds.
The BOJ is reportedly weighing whether to adopt a more aggressive tightening pace than its recent roughly twice-yearly cadence. Should the central bank move in September, it would mark a continuation of a policy path that has already taken rates to their highest level in three decades — with inflation data and a radical shift in economist consensus offering fresh support for those pushing for further and potentially faster action.
Sources
- [InvestingLive — BOJ seen hiking to 1.25% in September as yen weakness accelerates timeline](https://investinglive.com/central-banks/boj-seen-hiking-to-1-25pct-in-september-as-yen-weakness-accelerates-timeline/)
- [InvestingLive — Tokyo inflation data strengthens case for September BOJ hike](https://investinglive.com/news/tokyo-inflation-data-strengthens-case-for-september-boj-hike/)
