Bank of Japan supports gradual rate hikes, 80% expect rates to hit 0.5% next year.

The Comprehensive foreign exchange transactionsBank of Japan's policy board member Seiji Adachi recently stated that the Bank of Japan will adopt mild and gradual interest rate hikes in the future to maintain the current accommodative financial environment until the underlying inflation rate steadily and sustainably reaches 2%. Adachi pointed out that although conditions for policy normalization are in place, the central bank needs to act cautiously to avoid overly aggressive rate hikes that could once again result in market expectations of deflation. These conditions include the year-on-year distribution of various CPI prices no longer displaying characteristics of a deflationary period, and the current CPI level having surpassed the pre-deflation peak.

Data shows that as Japan's inflation pressure gradually rises, 51% of economists expect the Bank of Japan to keep the main interest rate at 0.25% by the end of 2024, up from 46% in September. Additionally, as many as 87% of economists predict that by the end of March 2024, the Bank of Japan will raise rates to 0.5%. This expectation reflects increased market confidence that the Japanese economy is gradually shaking off deflationary pressure. However, the Chief Market Economist at Daiwa Securities remarked that it is unlikely the Bank of Japan will proceed with further hikes before the end of next year's House of Representatives election and the determination of the next fiscal year’s budget in December.

From a macroeconomic perspective, the Bank of Japan needs to balance inflation control and economic growth while gradually raising rates. Although Japan's economy is gradually recovering, global economic slowdowns and external uncertainties may still impact its economy, particularly challenges posed by energy price fluctuations and supply chain bottlenecks. Furthermore, as one of the major global economies, changes in Japan's monetary policy will have a ripple effect on global financial markets, especially as several central banks worldwide are dealing with inflation pressures, making Japan's policy adjustments closely watched by international investors.

Overall, the Bank of Japan's strategy of gradual rate hikes reflects a cautious approach to domestic economic recovery and flexibility in addressing global inflation pressures. While there is strong market anticipation for rate hikes, the pace of future economic growth, the recovery of global supply chains, and external risks will remain key factors influencing Japan's monetary policy.

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