Economists: The Bank of Japan's interest rate hike next week is "a done deal," with the focus shifting to clues about the future path and neutral interest rate.

According to a survey of observers of the Bank of Japan, the Bank of Japan is expected to raise its policy interest rates next week, marking the first time the Bank has resumed a rate-hike cycle since January. The survey shows that all 50 economists expect that the Bank of Japan will raise its benchmark interest rate to 0.75% at the policy meeting ending next Friday. This is the first time that all respondents have predicted a change in interest rates since Haruhiko Kuroda became governor. After pausing rate hikes for several months to assess the impact of Donald Trump's tariff policies, the Bank of Japan is expected to resume its rate-hike cycle. As the market has already fully priced in the rate hike action, many observers of the Bank of Japan suggest that the focus of this meeting will be on any signals about future rate hikes and the potential peak of this cycle. "This rate hike is a done deal," wrote Kazuhiko Sano, chief bond strategist at Tokai Tokyo Securities, in his survey response. "One focus is whether the view on the neutral rate will be adjusted." The neutral rate is the level at which policy is neither tight nor loose, and is a key threshold to help determine the appropriate level of policy rates. Kuroda has previously stated that even with rate increases, policy settings will remain accommodative. Nearly two-thirds of analysts believe that the Bank will hike rates about every six months starting this month. Around 20% said they expect only one rate hike per year. Only 2% said they expect rate hikes every quarter. The median forecast for the terminal rate of this rate-hike cycle among economists has risen to 1.25%, indicating that many expect two more rate hikes after next week's hike. The widespread expectations in the market reflect efforts made by Kuroda to ensure effective communication with the market. The rate hike in July 2024 had caught many investors by surprise and was blamed as one of the causes of market turmoil. In early December, Kuroda made an unusual speech clearly indicating a rate hike at this meeting. Less than two weeks ago, the yen fell to a 10-month low against the dollar, intensifying the risk of further inflationary pressures through more expensive imports. The survey shows that about 81% of economists believe that the weak yen was the main factor compelling Kuroda to send this signal. According to 98% of respondents, the exchange rate of the yen is also a key factor preventing Prime Minister Takaichi Koizumi's government from pressuring the Bank of Japan to stop rate hikes. The Prime Minister, known for supporting a loose monetary policy, has not recently opposed rate hikes. The Bank of Japan has previously said that the neutral rate in Japan is between 1% and 2.5%. Nearly half of analysts said they expect the Bank to reveal some new information on its view of the neutral rate, while 30% said they do not expect this and another 23% said it is hard to say. Some market participants are eager to know if the Bank will suggest that the lower end of the range has been raised based on the latest data. Doing so would imply more room for rate hikes while also providing a floor for the yen. Jin Kenzaki, chief economist at France's Industrial Bank Japan, said that when he used updated data in the Bank of Japan's model to calculate the neutral rate, the estimated value increased by 0.1 percentage points. "It might be difficult to show a significant rise in the lower end of the range," Kenzaki said. The survey shows that about 80% of respondents believe that the Bank will continue to indicate that real interest rates are at "extremely low levels" as the policy rate is expected to be below the estimated range. This will be a key signal for the existence of further room to raise borrowing costs. Some observers of the Bank of Japan point out that the Bank needs to strike a balance in its communication. Hawkish signals could prevent further weakening of the yen, but could also lead to additional increases in bond yields. The benchmark 10-year government bond yield has hovered around 2%, the highest level since 2006, partly due to concerns about Japan's fiscal health. Rising yields would increase the government's debt-servicing costs. Last month, Koizumi allocated 17.7 trillion yen (about 113 billion dollars) for a new economic package aimed at mitigating the impact of inflation. About 71% of economists said the package was too large, while 23% believed it was appropriate. Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research and Consulting, said, "With concerns about the worsening fiscal health, the Bank of Japan must be highly vigilant about pushing up long-term bond yields due to rate hikes." "If the 10-year yield continues to rise, the Bank of Japan may become hesitant to further raise rates."