The Bank of Japan (BoJ) is expected to raise interest rates as early as December, moving up from an earlier forecast of a January hike, as policymakers respond to persistent inflation and rising wage growth. Economists have revised their outlook, now predicting a rate increase to 0.50% for 2024, up from a prior estimate of 0.25%, and further adjustments to 0.75% for both 2025 and 2026. This anticipated shift marks a significant turn in the BoJ's strategy, which has remained notably dovish compared to other major central banks.

Standard Chartered economists Chong Hoon Park and Nicholas Chia noted that markets remain vulnerable to a “hawkish surprise” from the BoJ in the fourth quarter, with potential implications for the USD/JPY, which they forecast at 140 by the end of the year. The economists cited the possibility of BoJ rate hikes and shifts in the Government Pension Investment Fund (GPIF) portfolio as key risks to their currency outlook.

The BoJ's policy shift comes amid stronger-than-expected inflation, which has remained above the bank's 2% target for 21 consecutive months. Real wages in Japan grew in June for the first time since March 2022, increasing by 1.1% year-on-year, and continued to show modest gains in July. This has heightened concerns over demand-driven inflation pressures and suggests that the BoJ might act sooner to avoid missing an opportunity to normalize its policy stance before global conditions potentially turn more dovish.

“We now expect the BoJ to hike the base rate by 25 basis points (bps) in December, from an earlier projection of smaller increases of 15 bps in Q2 and 10 bps in Q3 2025,” Park and Chia said. They also noted that the Federal Reserve's expected rate cuts of 75 bps by the end of 2024, along with risks of a global recession and slowing growth in China, could exert dovish pressures on global monetary policy, prompting the BoJ to act sooner rather than later.

Despite the potential for a December hike, Japan's interest rates would still remain well below those of other major economies, indicating that the Japanese yen (JPY) could continue to trade on the weaker side even with some rate hike-driven appreciation.

The BoJ's cautious approach to monetary tightening reflects its unique position among global central banks. While other economies have raised rates aggressively in recent years, the BoJ maintained a dovish stance in 2022 and 2023 to combat deflationary pressures, even as inflation persisted. However, the bank now appears ready to pivot, with strong wage growth and inflation data providing the impetus for a potential shift in policy.

Economists are also adjusting their long-term forecasts, now expecting the BoJ to increase rates to 0.75% in both 2025 and 2026. The next move could come in Q4 2025, depending on wage growth following the Shunto wage negotiations and broader economic trends.

As Japan edges closer to a more hawkish stance, investors will closely watch the BoJ's moves, knowing that any shift could have broad implications for global markets and the Japanese currency.