When will the Bank of Japan raise interest rates next? Economists expect December as the most likely timing, while the market bets on October

According to Zhitong Finance APP, the pace of future rate hikes by the Bank of Japan is facing a new round of policy tug-of-war. The latest survey shows that despite persistent inflationary pressures in Japan and a sharp depreciation of the yen, most economists still expect the Bank of Japan not to rush into consecutive tightening moves, with the next rate hike window more likely to occur in December this year. According to a survey of 52 economists by institutions, 50% of respondents believe the next rate hike is most likely to happen in December; 40% expect action in October.

In contrast, market pricing is clearly more aggressive, as by the end of the survey period, Japan's interest rate futures market indicated that investors saw roughly an 80% chance of an October rate hike by the Bank of Japan.

Kishida Administration’s Preference for Looser Policy Is the Greatest Uncertainty for Rate Hikes

The survey shows that 59% of economists believe the Kishida administration’s influence on the speed of monetary policy normalization will become a significant barrier to further rate hikes by the Bank of Japan.

Sanae Takaichi has long been inclined to support an environment of loose fiscal and monetary policy. Her economic policies advocate expanding government spending, supporting industrial investment, and avoiding a rapid tightening of financial conditions. Some economists believe that, although the Bank of Japan has already entered a rate hike cycle, the government’s concerns over economic growth and debt costs may limit the speed of policy adjustments.

The Bank of Japan has previously emphasized the independence of its monetary policy. To ease market concerns over possible “government intervention in central bank autonomy,” the Japanese government specifically revised and added language to “respect the independence of the Bank of Japan” in the recently approved annual economic and fiscal policy outline, attempting to address worries about government interference in central bank decision-making.

Earlier, the government's draft outline had triggered panic in the bond market, pushing the yield on Japan's 10-year government bonds to the highest level in nearly 30 years. However, the government's statement did not completely dispel market concerns. About two-thirds of surveyed economists made it clear they do not believe the changes in the government's wording mean it will refrain from interfering with the independence of the central bank's decisions.

Nevertheless, the survey shows that about two-thirds of economists still do not believe this adjustment signals the government will not try to influence the Bank of Japan in the future. Tsuyoshi Ueno, chief economist at NLI Research Institute, said: “Because of differences between the BOJ and the government regarding the pace of rate hikes, the bar for an early hike remains high.”

Divergence between Markets and Economists

The gap in expectations between economists and market participants is unusually large in this monetary policy cycle. Market participants are taking a more aggressive stance than economists, catalyzed directly by a report released after the survey period: According to sources, as the persistent weakness in the yen intensifies upside inflation risks, Bank of Japan officials are open to raising rates at a faster pace than generally expected by economists. The officials are aware many observers expect the central bank to move about every six months, but they are willing to hike earlier if necessary, without a preset path. Derivatives market pricing indicates traders have at times assigned an 80% chance of a rate hike by October.

Officials say it's particularly important now to closely examine additional upside risks to prices, since the underlying inflation rate is finally very close to the 2% target set by the bank over thirteen years ago. With the underlying inflation rate approaching 2%, some officials believe the central bank’s task is shifting—policy makers are increasingly focusing on anchoring inflation steadily near the target instead of spurring price increases.

Moreover, officials see mounting evidence of more entrenched inflation—companies are passing on cost increases to customers faster than before, reflecting changes in pricing behavior since the outbreak of the Iran conflict.

Yen’s Plunge Past 163 and Rising Oil Prices: Upside Inflation Risks May Force BOJ Into Early Action

Although political resistance remains significant, the possibility of the Bank of Japan being forced to “hit the rate hike button early” under the dual pressures of exchange rates and Middle Eastern tensions cannot be ignored.

At its June 16 policy meeting this year, the Bank of Japan raised the benchmark interest rate to a historic high of 1.0% without clear government opposition. 65% of BOJ watchers surveyed indicated that the persistent yen depreciation and soaring import costs at the time forced the Kishida administration to accept this rate hike decision passively.

More recently, geopolitical risks have again ignited turmoil in the forex and commodity markets: The yen fell below its all-time low as US-Iran tensions escalated and international crude oil prices spiked; the yen-dollar exchange rate even broke past 163, the lowest since 1986. Imported inflation has intensified, and with Japan nearly fully dependent on imports for energy and more than half its food, the extremely weak yen has directly amplified the cost pressures from oil and bulk commodity imports.

In this context, economists have loosened their attitude toward an “earlier-than-expected rate hike.” When asked the earliest possible time for the next policy move, 37% of experts chose September this year (up from 23% after the June meeting).

Kento Minami, economist at Daiwa Securities, said: “The persistent depreciation of the yen continues to drive up prices, and the upside risks to inflation remain significant. The Bank of Japan is shifting the focus of its rate decisions towards coping with inflation risks, making the timing of the next rate hike potentially earlier than previously expected.”

It is worth noting that about 65% of BOJ watchers believe it was precisely the continuous depreciation of the yen that forced Sanae Takaichi to accept the June 16 rate hike—when the policy rate was raised to 1%, the highest in 31 years.

The Tug-of-War Between the Japanese Government and BOJ: From Economic Blueprints to Bond Market Turbulence

The tense relationship between the Kishida administration and the Bank of Japan came to the fore in the annual economic and fiscal policy guidelines finalized on July 21.

The earlier draft, which called for monetary policy to "boost private demand," was deleted. After shaking up the market, the relevant language was further revised to clarify that central bank policy aims to "achieve stable price increases." The final version retained language urging policy consistency between the central bank and the government, but added a footnote citing legal provisions safeguarding the central bank’s independence.

However, market concerns have not disappeared. Earlier versions of the draft had triggered worries that policy normalization could be delayed, once sending the benchmark 10-year Japanese government bond yield to a 30-year high. In mid-July, the 10-year yield climbed to 2.9%, the highest since September 1996. As of July 23, the 10-year yield was still around 2.77%.

Eugene Leow, Senior Rates Strategist at DBS Group Research, noted that since early 2026, the spread between one-year dollar rates and one-year yen rates has continued to widen. Investors have shifted their expectations for the Federal Reserve from rate cuts to hikes, while Japan’s rate adjustments have been much more gradual. The US-Japan interest rate differential still holds at a massive gap of about 250 to 275 basis points.

July 31 Meeting: Status Quo Likely, Focus Shifts to Outlook Report

The market generally expects the Bank of Japan to keep its policy rate unchanged at 1.0% at the July 31 monetary policy meeting. As Governor Kazuo Ueda missed the last meeting due to illness, the upcoming press conference marks the first direct opportunity for the public to gauge his policy stance.

Yusuke Matsuo, economist at Mizuho Securities, expects Ueda to reiterate the stance of further rate hikes at next week’s press conference, but such remarks are unlikely to reverse the yen’s weakness. "The market has largely priced in a rate hike every six months, so it will be difficult for such comments alone to cause the yen to rise significantly. Given that the market expects the central bank to clarify the timing and magnitude of the next hike, any stance interpreted as dovish could further weaken the yen against a stronger dollar."

At the upcoming policy meeting, the Bank of Japan’s latest quarterly economic outlook will be the main basis for the market to judge the rate outlook. According to the median forecasts of surveyed economists: Fiscal year 2026 inflation is expected to be slightly revised down from the previous 2.8% to 2.6%. Fiscal year 2026 real GDP growth is expected to be revised up from the previous estimate to 0.7%.

Can the Every-Six-Months Rate Hike Rhythm Continue?

The Bank of Japan faces a nearly insoluble dilemma: If it maintains low rates, it may fuel inflation pressure caused by a weaker yen; but if rate hikes are too fast, it may aggravate repayment pressures and drag down Japan’s already fragile economic recovery.

The consensus among economists is about one rate hike every six months. Yet with the yen hovering around 163, US-Iran tensions driving up oil prices, and the US-Japan yield gap continuing to widen—these realities are increasingly testing the sustainability of this schedule.

The market has drawn its own conclusion: There is an 83% probability bet on action before October. And with BOJ officials stating they are “open to faster rate hikes,” this bet seems even more justified.

Minami said: "The Bank of Japan is now shifting the focus of its rate decisions towards managing upside inflation risk." As inflation risk collides with political resistance, the BOJ’s next rate hike—whether in October or December—will become one of the most important macro narratives in global capital markets.