When will the Bank of Japan (BOJ) raise interest rates next?

What will the interest rate level be by the end of 2025?

UBS and HSBC have different views.

On Friday, September 20th, the BOJ announced that it would maintain interest rates, in line with market expectations.

UBS economists Go Kurihara and Masamichi Adachi released a report stating that they expect the BOJ to raise rates in December.

However, HSBC economist Jun Takazawa believes that the BOJ will keep rates unchanged this year and will increase rates to 0.50% in January next year.

The BOJ did not reveal clear information about the next rate hike, but its overall attitude is slightly dovish.

According to the statement released by the BOJ, Japanese financial conditions remain loose, and the assessment of private consumption has been slightly upgraded from "resilient" to a "modest growth trend," which is consistent with recent data.

Governor Haruhiko Kuroda stated that the depreciation of the yen has somewhat reduced the risk of rising prices, and he still has time to consider raising rates.

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If the economic and inflation trends align with the central bank's outlook, the BOJ will continue to raise rates.

HSBC believes that the BOJ's next rate hike will be in January next year, while UBS expects the BOJ to raise rates in December instead of October as previously forecasted, for three reasons: 1.

As Kuroda stated, global financial market conditions remain unstable, and UBS believes they will not stabilize in the near term—especially before the U.S. presidential election on November 5th.

2.

The market generally expects the BOJ to raise rates in December, and UBS thinks the BOJ may follow market expectations to avoid disrupting the market.

3.

Japan may hold a general election before the monetary policy meeting on October 31st.

Political events in Japan and the U.S. will affect the decision to raise rates.

However, if the yen depreciates significantly in the next six weeks and the dollar-to-yen exchange rate quickly rises above 150, the BOJ's meeting at the end of October may consider raising rates.

Nevertheless, UBS believes it is more likely that the dollar-to-yen exchange rate will fall.

UBS also notes that LDP candidate Sanae Takaichi has entered the ranks of frontrunners.

She has a dovish stance on fiscal and monetary policy and has expressed opposition to further rate hikes by the BOJ.

If she is elected, the threshold for the BOJ to raise interest rates may become higher.

UBS expects that after the rate increase to 0.5% in December, the BOJ will have two more 25 basis point rate hikes in 2025, in April and October.

Therefore, the Japanese interest rate level will reach 1% by the end of next year.

UBS's forecast is more hawkish than the market consensus, which currently expects the Japanese policy rate to reach about 0.75% by the end of 2025.

HSBC believes that the BOJ is most likely to carry out two 25 basis point rate hikes in January next year and the third quarter.

Previously, UBS expected the BOJ to raise rates in March rather than April next year, but now UBS thinks that the BOJ has become more cautious, making policy changes during the quarterly outlook report updates more acceptable to the market and the public—April is the first month of the fiscal year, and the BOJ may obtain sufficient evidence to prove that wage growth in 2025 remains high and considers that underlying inflation will rise towards 2% between October 2025 and March 2027.

UBS also forecasts that Japan's CPI for the fiscal year 2026 will be 1.6%, lower than the BOJ's forecast of 1.9%.

Therefore, UBS believes that the BOJ may acknowledge that Japan's neutral interest rate will be 1% or lower by the end of 2025.