The Bank of Japan raised its policy rate to 1.25% in September, and the timing of future rate hikes will be reconsidered at the October policy meeting. The market is discussing the possibility of an additional hike by year-end and a change in the rate level in December, while the impact on the dollar-yen exchange rate, Japanese stocks and government bonds is drawing attention.
At its September monetary policy meeting, the Bank of Japan raised its policy rate from 1.00% to 1.25%. It is scheduled to hold a meeting on 29-30 October and publish its outlook and the timing of future rate hikes, with decisions expected to take into account wage growth, prices, economic conditions and exchange rate trends.
Market participants are considering a scenario in which the policy rate is raised to 1.50% in December 2026. In a Reuters survey of economists, 54 of the 78 respondents expected a rate hike by year-end, and approximately 80% selected December.
Three conditions have been cited for the Bank of Japan to decide on an additional rate hike: whether inflation will remain sustainably around 2% on an underlying basis, whether wage growth can absorb price increases, and whether exchange rates and import costs will pass through to domestic prices.
The dollar-yen exchange rate could face upward pressure on the yen as the US-Japan interest rate differential narrows, although yen depreciation could continue depending on US policy and market sentiment. The impact of a rate hike on Japanese stocks could vary by sector. Bank stocks could benefit from expectations of improved net interest margins, while other stocks could come under downward pressure.
In the government bond market, rising expectations of an additional rate hike could push government bond yields higher and drive down the prices of outstanding bonds. The Bank of Japan's decision will also be influenced by the content of its Outlook for Economic Activity and Prices and the governor's press conference.