The Bank of Japan (BOJ) is expected to consider its next interest rate hike, potentially raising the policy rate to 1.00% around June or July next year. However, this move will depend heavily on economic conditions, as well as developments in wages and prices.

Further rate increases beyond this may prove more challenging. This is because higher borrowing costs would approach the BOJ’s neutral rate—the level at which monetary policy neither stimulates nor restricts the economy—which has not been publicly defined. Despite this, the BOJ likely views the neutral rate to be around 1.75%.

A rate increase to 1.50% would still fall comfortably below this estimated neutral threshold and leave the central bank with some room to cut rates if necessary in the future.

If economic conditions hold steady, including continued support from the US economy and domestic inflation remaining above the BOJ’s 2% target, the bank might implement as many as two additional rate hikes in the next fiscal year. Conversely, if economic uncertainty rises, the BOJ could limit itself to only one rate hike next fiscal year and postpone further increases until 2027.

The bank appears inclined to resume raising rates roughly once every six months, but this plan is complicated by political pressure, particularly from Japan’s Prime Minister Takaichi, who has criticised the tightening policy. This tension may explain recent ambiguous communications from BOJ Governor Ueda.

According to an interview with Sakurai—who reportedly maintains close contact with current BOJ policymakers—the central bank is unlikely to explicitly signal an imminent rate hike. Ueda has left the possibility open but has not committed to raising rates immediately following the spring wage negotiations in March.

Moving forward, the BOJ will continue to assess policy on a meeting-by-meeting basis, with a much higher threshold for rate increases than before. Traders should be mindful of the potential for political pushback from Takaichi’s administration, which now factors into the BOJ’s decision-making process.

Original Source: Justin Low of investinglive.com