Economists: The Bank of Japan is expected to raise interest rates again in the fourth quarter, possibly in October

Economists generally expect the Bank of Japan to raise interest rates again in the fourth quarter of this year, marking an increasingly clear path toward the normalization of its monetary policy.

According to a survey conducted by Reuters from August 12 to 19, nearly two-thirds of economists predict that the Bank of Japan will take action in the fourth quarter, raising the benchmark interest rate from the current 0.50% by at least 25 basis points, an increase from just over half in last month's survey. October has become the most likely time for the rate hike.

Despite recent news of a weak U.S. job market rekindling market bets on a rate cut by the Federal Reserve next month, 70% of analysts in the survey believe this will not delay the Bank of Japan's tightening of monetary policy.

October Rate Hike Window Emerges

Market attention is generally focused on the fourth quarter. Among the 40 economists who clearly predicted the month of the rate hike, October emerged as the most popular choice, receiving 38% support. This was followed by January next year (30%) and December this year (18%).

Hiroshi Namioka, chief strategist at T&D Asset Management, pointed out that October is an ideal decision-making time. He stated, "By October, the Bank of Japan will be able to respond after the direction of U.S. monetary policy and domestic political dynamics in Japan become clearer." Additionally, the Bank of Japan will release its quarterly outlook report that month and hold a policy meeting after the branch managers' meeting, providing a more solid basis for decision-making.

Although market expectations for another rate hike by the Bank of Japan this year are heating up, the policy is expected to remain stable in the short term. According to the survey, as many as 92% (67 out of 73) of economists expect the Bank of Japan to keep interest rates unchanged at the upcoming policy meeting in mid-September.

Inflation Pressure and Fiscal Risks

The core driving force pushing the Bank of Japan toward a rate hike is persistently high inflation. Data shows that Japan's consumer inflation rate has exceeded the central bank's 2% target for more than three consecutive years. However, the Bank of Japan has remained cautious in its actions, partly due to concerns that U.S. tariff policies may harm economic growth.

At the same time, the direction of domestic fiscal policy in Japan has also become a focus of economists' attention. The survey shows that more than two-thirds of respondents expressed concerns about the pressure for fiscal spending expansion. Previously, the opposition party calling for a reduction in the consumption tax made progress in last month's House of Councillors election.

Kyohei Morita, chief economist at Nomura Securities, warned that, combined with the results of last year's House of Representatives election where the ruling coalition lost its majority, Japan "is now easily making short-sighted policy choices," and pointed out that "the risk of considerations for fiscal sustainability falling below the appropriate level is increasing."

However, there are differing views. Junya Takemoto, a senior economist at Sumitomo Mitsui Banking Corporation, believes that extreme fiscal expansion is unlikely to occur, as the ruling party remains cautious about expanding the primary deficit in the context of rising interest rates