Bank of Japan Expected to Raise Rates to 1.25% by Year-End, Reuters Survey Shows

The Bank of Japan (BOJ) is widely expected to continue tightening monetary policy throughout 2026, with economists forecasting interest rate increases this month and later in the year as inflation concerns outweigh risks to economic growth.

According to a Reuters poll of economists conducted between June 2 and June 8, the BOJ is expected to raise its benchmark interest rate to 1.0% by the end of June and then increase it further to 1.25% during the fourth quarter.

BOJ Signals Stronger Focus on Inflation

Expectations for a June rate hike strengthened after BOJ Governor Kazuo Ueda delivered remarks last week that were widely interpreted as signaling a more aggressive stance against inflation.

His comments suggested the central bank is becoming increasingly focused on controlling price pressures, paving the way for a gradual but sustained increase in borrowing costs.

Economists believe underlying inflation is moving closer to the BOJ’s 2% target, while supply constraints in the economy could fuel additional price increases in the months ahead.

Atsushi Takeda, Chief Economist at Itochu Research Institute, noted that inflation risks remain elevated and argued that maintaining extremely loose monetary policy could allow inflationary pressures to accelerate further.

Majority of Economists Expect June Rate Increase

The Reuters survey revealed overwhelming support for a near-term rate hike.

Of the 70 economists surveyed, 66 expect the policy rate to reach 1.0% by the end of June, representing 94% of respondents. This marks a significant increase from May, when only 65% of economists expected rates to reach that level.

Additionally, all but one of 69 respondents forecast that the policy rate would be at least 1.0% by the end of September.

Further Rate Hikes Likely in Late 2026

Looking beyond June, expectations for additional policy tightening remain strong.

More than three-quarters of surveyed economists anticipate the BOJ will raise rates again in the fourth quarter, bringing the policy rate to 1.25% by year-end.

Forecasts have also become more aggressive for 2027. Approximately two-thirds of economists now expect the benchmark rate to reach 1.50% during the second quarter of next year, earlier than previous projections that pointed to the third quarter.

Weak Yen Adds Pressure on Policymakers

The Japanese yen remains another important factor influencing the BOJ’s policy decisions.

With the USD/JPY exchange rate hovering near the closely watched 160 level, policymakers face increasing pressure to support the currency. Analysts warn that delaying rate hikes could lead to further yen weakness and increase the likelihood of market intervention.

According to Citigroup economist Sosuke Nakamura, recent yen depreciation and rising global interest rates have increased the risks associated with postponing monetary tightening.

Focus Turns to BOJ and Federal Reserve Meetings

The Bank of Japan is scheduled to conclude its next two-day policy meeting on June 16, just before the U.S. Federal Reserve announces its own policy decision.

While markets broadly expect the Fed to keep rates unchanged in the near term, stronger inflation data and resilient labor market conditions have increased speculation that the U.S. central bank could still raise rates later this year.

The interaction between BOJ and Fed policy decisions will likely play a major role in determining the future direction of the yen and global currency markets.

Japan’s Economy Remains Resilient

Recent economic data showed that Japan’s economy lost momentum during the first quarter of the year. Revised GDP figures released this week indicated slower growth between January and March.

Despite this slowdown, economists remain optimistic about the broader outlook. Many believe that the economic impact of geopolitical tensions, including the conflict involving Iran, is unlikely to significantly weaken consumer spending or business investment.

This resilience supports the BOJ’s ongoing efforts to normalize monetary policy after years of ultra-low interest rates.

Inflation and Growth Forecasts Remain Stable

Economists’ projections for Japan’s economic performance remained largely unchanged from the previous month’s survey.

Average GDP growth is expected to reach 0.6% in fiscal 2026 and 0.9% in fiscal 2027. Meanwhile, core consumer inflation is forecast to average 2.4% in fiscal 2026 and 2.2% in fiscal 2027, remaining above the BOJ’s long-term target.

These projections reinforce expectations that the central bank will continue its gradual path toward higher interest rates over the coming quarters.