Most BOJ Watchers Rethink Pace of Hikes After Ueda’s Hawkishness

(Bloomberg) — Most Bank of Japan watchers are reassessing the trajectory of interest rates and bringing forward their forecasts after Governor Kazuo Ueda’s hawkish messaging Wednesday and his earlier-than-expected rate hike. 
Some 68% of 41 economists see the policy rate rising to 0.5% from 0.25% by the end of this year, according to a Bloomberg survey conducted Thursday. Just under a quarter predicts the hike to come in October, while 44% opt for December. Another fifth expects the move to take place in January. 
The median forecast for the end-of-year rate level doubled to 0.5% from the previous survey conducted before the policy meeting that ended Wednesday. 
The results reflect a shift in economists’ perceptions of Ueda’s policy stance after the governor clearly indicated more hikes are in the pipeline. Overall, a majority of the surveyed analysts said this week’s rate hike was appropriate, an indication that Ueda has had success making the case for the increase. 
“The BOJ is firmly determined to normalize policy,” Taro Kimura, an economist at Bloomberg Economics, wrote in a survey response. “There is a very good chance for a rate hike in October.”
Wednesday’s rate move came alongside a reduction in the central bank’s purchases of government bonds. Many analysts had expected Ueda to avoid a double tightening step due to the risk of surprising financial markets. 
Ueda followed the announcement by saying he will keep raising rates as long as inflation remains in line with the bank’s outlook, a remark that firmed up the impression the pace of rate hikes would be faster than previously priced in. 
“Ueda’s hawkish tone was strong at the press conference,” said Shotaro Mori, senior economist at SBI Shinsei Bank. “I expect a series of rate increases toward 1%.”
For the end of the following year, the BOJ watchers expect borrowing costs to reach 0.75%, indicating their view that there will only be one more hike in 2025 as the rate approaches a level that is neither contractionary or expansionary, according to the poll. The economists expect the terminal rate of this rate hike cycle to be 1%.
Japanese stocks tumbled and the yen surged Thursday in response to the BOJ’s decision Wednesday. Some analysts flagged uncertainties over the path of BOJ policy going forward. 
“Among the many logical issues is the lack of confirmation of a virtuous cycle of wages and inflation,” said Yasunari Ueno, chief market economist at Mizuho Securities. “The hurdle is high for more rate hikes as weakness in inflation will gradually emerge along with the risk of a strong yen once the Fed begins to cut rates.”
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