BOJ to raise rates to 1.25% this month, reach 1.75% faster than expected: Reuters poll

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TOKYO, Sept 10 : The Bank of Japan will hike interest rates to 1.25 per cent on September 18 and then to 1.75 per cent in the second quarter of 2027 — earlier than previously thought — a Reuters poll showed, amid persistent concerns over broadening price pressures and yen weakness.

More than 80 per cent of respondents said the joint U.S.-Japan yen-buying intervention to stem the currency's slide to 40-year lows and remarks by Treasury Secretary Scott Bessent on BOJ policy had "significantly" or "somewhat" lowered political hurdles for rate hikes, underscoring Washington's growing sway over Japanese monetary policy and raising questions about the bank's independence.

Bessent voiced strong support for "decisive" monetary steps to combat yen weakness in a meeting with BOJ Governor Kazuo Ueda this month during a gathering of G20 finance ministers and central bank governors. He also urged the BOJ to anchor inflation expectations and avoid excessive yen volatility through sound monetary policy.

"Until now, it would be hard for the BOJ to explain any adjustment to the degree of monetary easing while the (Japanese) government maintained an accommodative fiscal stance," said Yusuke Koshiyama, senior Japan economist at Mizuho Research Institute.

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"But having secured U.S. cooperation in the latest coordinated intervention, the government will now find it difficult to take a position that runs counter to Washington's wishes. It will likely have little choice but to effectively endorse Bessent's stance in favour of BOJ rate hikes."

The September 1-8 survey showed all but two of 68 economists, or 97 per cent, expected the BOJ to raise rates on September 18, up from 57 per cent in a previous poll. Although still a minority, more than one-third, 24 of 66 economists, anticipated the bank would follow with another hike to 1.50 per cent in either October or December, roughly double the share in August.

"Since Japan's hesitation over policy tightening in the past, the faster build-up of inflation expectations suggests the central bank might need to hike rates more to achieve the same outcome," said Kelvin Lam, senior economist at Pantheon Macroeconomics.

Beyond this year, 89 per cent of analysts, 57 of 64, expected the policy rate to reach at least 1.50 per cent by end-March next year, up from 65 per cent last month. Around 62 per cent saw the rate reaching at least 1.75 per cent by end-Q2 2027, three months earlier than predicted in August's poll.

Half of 54 respondents who answered an extra question said 1.75 per cent would be the terminal rate, unchanged from last month. The share of those choosing 2.00 per cent or higher rose to 40 per cent from 36 per cent in August and 23 per cent in July. 

Early hints of capital repatriation and expectations of a faster pace of monetary tightening by the BOJ along with U.S. pressure are combining to boost the yen, which traded around 153.37 per dollar on Wednesday, near its strongest level since February.

RECORD BUDGET REQUEST CAUSE FOR CONCERN

Japan's budget requests for the next fiscal year totalled 143.1 trillion yen ($931.2 billion), swelling to pandemic-era levels as Prime Minister Sanae Takaichi's expansionary fiscal agenda drove government borrowing costs to three-decade highs.

Almost three-quarters of economists, 28 of 38, said the total amount of requests heightens market concerns about Japan's fiscal discipline.

Some analysts said those concerns could rise further as the final size of the budget and the amount of new government bond issuance becomes clearer towards year-end.

"Although the size of budget requests does not assume the compilation of a supplementary budget, it is on a par with that in fiscal 2021 during the COVID-19 pandemic, and is quite large for a peacetime budget," said Kei Fujimoto, senior economist at Sumitomo Mitsui Trust Asset Management.

"With a consumption tax cut (on food items) also planned, financial markets are likely to have strong concerns about securing funding."

(For other stories from the Reuters global economic poll)

($1 = 153.6700 yen)

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