The Bank of Japan is widely expected to raise its policy rate to 1.00% at its June meeting, according to a May 7-14 poll of economists. Sixty-five percent of respondents - 40 out of 62 - forecast the central bank would lift its key rate from the current 0.75% to 1.00% by the end of June, reflecting pressure on the BOJ to normalise monetary settings amid inflationary pressures linked to the war in Iran.
Policy was left unchanged at 0.75% in April as the BOJ paused to assess the economic impact of geopolitical developments, but three of the central bank's nine board members dissented at that meeting and favoured a rise to 1.00%, a signal of mounting concern over an energy-driven inflation shock. One board member who voted to keep policy steady in April, Kazuyuki Masu, said recently that the bank should raise interest rates as soon as possible if there are no clear signs of an economic slowdown, comments that suggest he could join the dissenters when the board reconvenes next month.
Poll responses showed broad agreement on the near-term path for rates. All but one of the 62 economists surveyed expected a rate increase by the end of September. Median projections from the poll pointed to continued tightening later in the year - a policy rate of 1.25% in the fourth quarter - and further firming to 1.50% in the third quarter of the following year, results that matched the prior month's survey.
Yusuke Matsuo, senior market economist at Mizuho Securities, framed the timing succinctly: "Given that economic, price and wage conditions that would make a rate hike feasible are, at present, still intact ... we see the June meeting, roughly six months after the December 2025 meeting, as the most likely timing for the next hike." His assessment highlights how market economists are linking observable price and wage trends to the BOJ's decision window.
Currency dynamics and intervention have added urgency to the debate over policy. Japanese authorities have conducted repeated currency interventions to defend the yen as it slid past the 160-per-dollar threshold. The interventions have amounted to roughly 10 trillion yen in recent weeks, approximately $63.35 billion, aimed at stemming the currency's decline.
Some market participants argue that such interventions lose potency if monetary policy remains loose - a position voiced by several economists. Nomura Securities' chief economist Kyohei Morita noted the BOJ would be inclined to raise rates in June to counter upside price risks from yen depreciation, which increases import costs and burdens the broader economy.
At the same time, a number of economists cautioned that lingering uncertainty from the war could persuade the BOJ to delay further tightening. Those analysts pointed to potential hits to consumption and the risk of production cutbacks caused by supply-chain disruptions as factors that could temper the central bank's tempo.
Political considerations are also in play. Prime Minister Sanae Takaichi has previously advocated for looser monetary policy, a position that could complicate the BOJ's moves toward normalisation if political pressure persists.
Inflation risks were a prominent theme in the poll. Japan's policy rate - at 0.75% - remains below what economists describe as the neutral rate that neither stimulates nor restricts activity. With inflation running around 2%, keeping real borrowing costs deeply negative risks overheating the economy and further weakening the yen.
When asked an additional question on the balance of risks over the next 12 months, almost three-quarters of respondents (28 of 39) said sustained inflation presents a larger threat to the Japanese economy than a demand slowdown. That view underpins expectations for tightening even amid concerns about fragile domestic demand.
Hiroshi Namioka, chief strategist at T&D Asset Management, flagged the limits of currency intervention in this environment: "Authorities are trying to stem the yen's slide by signalling their readiness to intervene, but the effect is likely to be limited given negative real interest rates and the risk that high crude oil prices will worsen the trade balance." His comment links the exchange rate, real interest rates and energy costs to the BOJ's policy challenge.
Market watchers will be closely following the BOJ's communications and incoming data in the weeks leading to the June meeting. The central bank faces a delicate balancing act - addressing inflation and currency depreciation without unnecessarily curbing activity should economic momentum falter amid geopolitical uncertainty.
($1 = 157.8500 yen)