The majority of economists surveyed expect the Bank of Japan to raise its benchmark rate by 25 basis points this week, according to a new poll. The anticipated move is attributed to rising inflation, sustained wage growth, and mounting pressure from the U.S. administration. If implemented, this rate hike would signal an accelerated pace of monetary tightening, departing from the central bank's previous pattern of adjusting rates every six months.

Nearly five out of every ten respondents project the yen to trade within a range of 155 to 160 against the dollar over the coming month. This survey was conducted between September 9th and 14th, gathering insights from 18 economists and analysts.

Following the conclusion of its two-day policy meeting, the Bank of Japan is highly likely to lift its interest rate to 1.25% this Friday, as suggested by a recent survey. This decision stems from prevailing inflationary pressures and marks a notable acceleration in the pace of its tightening cycle. Since initiating the normalization of monetary policy in March 2024, the central bank has adhered to a cadence of a rate increase every six months, with the last hike occurring in June.

Approximately 89% of economists participating in the poll anticipate a 25 basis point increase, citing upward price trends, increasing wages, and significant pressure from the United States government as primary drivers. Japan's inflation rate reached 1.9% in July, its highest level this year, largely due to rising energy costs stemming from the conflict in Iran. In the same month, real wages saw a 2.4% year-on-year increase, marking the seventh consecutive month of growth.

The United States has publicly expressed its desire for Japan to advance its interest rate hiking cycle. This stance creates a point of contention with Prime Minister Shigeru Ishiba's government, which favors a more accommodative monetary policy and expansive fiscal measures. During a G20 meeting of finance ministers and central bank governors earlier this month, U.S. Treasury Secretary Scott Bessent called on Japan to take "decisive market and monetary policy actions."

The U.S. seeks a stronger yen; conversely, if the yen continues to weaken, Japan might resort to selling U.S. assets like Treasuries to support its currency, which could, in turn, push U.S. bond yields higher. Towards the end of July, Japanese and U.S. authorities conducted a landmark coordinated intervention to bolster the yen's value.

"The Trump administration has effectively curtailed the possibility of the Ishiba government obstructing the Bank of Japan's rate hikes," noted Tetsuya Kinoshita, chief economist at Nomura Research Institute and a former BOJ policy board member. "This grantsthe central bank the operational space to proceed with tightening." Recent comments from some BOJ board members also carry a hawkish tone, leaving the door open for an expedited increase in the pace of monetary tightening.

Diverse Perspectives from the Survey

Jesper Koll, an expert director at MUFG Group, predicts the Bank of Japan will conduct a single 50 basis point increase, thereby concluding the current tightening cycle. Conversely, Carlos Casas, senior Asia economist at Julius Baer Group, expects the central bank to hold rates steady this time. He believes the BOJ's actions are already lagging behind the curve but anticipates two separate 25 basis point hikes at six-month intervals later on.

"Current data does not yet substantiate a shift in the policy paradigm, as there's insufficient evidence to support a more rapid pace of rate increases," Casas explained. He also highlighted tensions in Iran and oil price volatility as major risk factors. When questioned about which board members might most likely oppose a rate hike, roughly one-third of respondents named Tomohiro Asada and Ayano Sato. Both are known inflation-revival proponents and were appointed this year by Prime Minister Ishiba.

Regarding currency movements, approximately 61% of those surveyed expect the yen to trade in the 155-160 range against the dollar in the next month. Lee Haomin, senior macro strategist at Lombard Odier, believes the Bank of Japan's shift towards a hawkish stance will help defend the 160 level for the yen. However, he notes that driving the currency to appreciate beyond 150 will pose significant challenges, as both the government and corporate sectors would resist an excessively rapid strengthening of the yen.

Note: The 155-160 range refers to the exchange rate of yen per U.S. dollar, and a basis point equals 0.01%, making 25 basis points equivalent to 0.25%.