BOJ to Hold Rates at 1.25% but Hike Possible by Early 2026

The Bank of Japan (BOJ) is expected to keep its policy rate unchanged at 1.25% during its two-day meeting ending Friday, according to a CNBC survey of 16 respondents. This follows the BOJ's recent rate increase to the highest level in 31 years. While no immediate hikes are expected, all surveyed economists anticipate the BOJ preparing for a rate increase in December 2025 or January 2026 due to rising domestic inflation and wages.

Japan's core inflation rose 2.1% year-over-year in September, its highest so far this year, driven by a weak yen and higher energy costs, despite government subsidies offsetting some energy expenses. Inflation-adjusted wages increased by 1.5% in August, marking the eighth consecutive month of wage growth. Finance Minister Satsuki Katayama noted that Japan is approaching a period of sustained inflation fueled by wage increases alongside rising import costs.

Market strategists noted some challenges, including fragile domestic bond markets and uncertainty over consecutive hikes. The yen is expected by most respondents to trade between 157 and 158 against the US dollar in the next month, though projections for three months vary from 150 to 160 yen. The BOJ's policy decisions and communication about inflation's status will be closely watched as these will influence market rates and currency flows. These developments matter for investors because interest rate changes and inflation shifts directly impact Japan's bond yields, currency valuations, and capital flows.