Japan raised interest rates and wants to "wait and see", could the next time be in December?

When will the Bank of Japan raise interest rates next? What will the interest rate level be at the end of 2025? UBS and HSBC have different views.

On Friday, September 20th, the Bank of Japan announced that it would keep interest rates unchanged, in line with market expectations. UBS economists Go Kurihara and Masamichi Adachi released a report stating that they expect the Bank of Japan to raise interest rates in December. However, HSBC economist Jun Takazawa believes that the Bank of Japan will keep interest rates unchanged this year and raise them to 0.50% in January next year.

The Bank of Japan did not disclose specific information about the next rate hike, but its overall attitude is slightly dovish. According to the statement released by the Bank of Japan, Japan's financial conditions remain accommodative, and the assessment of private consumption has been revised slightly from "resilient" to "moderate growth trend," in line with recent data.

Governor Haruhiko Kuroda stated: The depreciation of the yen has reduced the risk of price increases, giving him more time to consider raising interest rates. If the economic and inflation trends align with the central bank's outlook, the Bank of Japan will continue to raise interest rates.

Next rate hike may be in December

HSBC believes that the Bank of Japan's next rate hike will be in January next year, while UBS expects the Bank of Japan's next rate hike to be in December instead of the previously expected October, for three reasons:

1. As Kuroda mentioned, the global financial market situation remains unstable, and UBS believes it will not stabilize in the near term—especially before the U.S. presidential election on November 5th.

2. Currently, the market generally expects the Bank of Japan to raise interest rates in December. UBS believes that the Bank of Japan may follow market expectations to avoid disrupting the market.

3. Before the monetary policy meeting on October 31st, Japan may hold a House of Representatives election. Political events in Japan and the United States will both affect interest rate decisions.

However, if the yen depreciates significantly in the next six weeks and the U.S. dollar rises rapidly by more than 150 against the yen, the Bank of Japan's meeting at the end of October may consider raising interest rates. However, UBS believes there is a greater probability of the U.S. dollar falling against the yen.

UBS also noted that Liberal Democratic Party candidate Sanae Takaichi has emerged as a frontrunner. She has a dovish stance on fiscal and monetary policy and has expressed opposition to further rate hikes by the Bank of Japan. If she is elected, the threshold for the Bank of Japan to raise rates may be higher.

Two more rate hikes next year

UBS expects that after the interest rate rises to 0.5% in December, the Bank of Japan will have two more 25 basis point rate hikes in 2025, scheduled for April and October. Therefore, Japan's interest rate level will reach 1% by the end of next year.

UBS's forecast is more hawkish than the market consensus. Currently, both the market and HSBC expect Japan's policy interest rate to reach around 0.75% by the end of 2025. HSBC believes that the Bank of Japan is most likely to raise interest rates twice by 25 basis points in January next year and the third quarter Previously, UBS forecasted that the Bank of Japan would raise interest rates in March next year instead of April, but now UBS believes that the Bank of Japan has become more cautious, making policy changes during the quarterly outlook report update, which are more likely to be accepted by the market and the public—April is the first month of the fiscal year, and the Bank of Japan may obtain enough evidence to prove that wage growth will remain high in 2025 and that underlying inflation will increase towards 2% between October 2025 and March 2027.

UBS also predicts that Japan's CPI for the 2026 fiscal year will be 1.6%, lower than the Bank of Japan's forecast of 1.9%. Therefore, UBS believes that the Bank of Japan may acknowledge that by the end of 2025, Japan's neutral interest rate is 1%, or even lower.