When will the Bank of Japan raise rates further?

• It is predicted that the Bank of Japan will continue with its monetary policy tightening campaign, but there is disagreement among market participants regarding the timing of the next interest rate increase.
• According to senior economist Stefan Angrick of Moody's Analytics, there is a high likelihood of another interest rate hike in October, with at least one more expected in 2025, possibly as early as January.
• Despite being a former BOJ official and currently an executive economist at Mizuho Research & Technologies, Kazuo Momma anticipates the central bank will maintain rates at their current level in October.

The Bank of Japan is predicted to maintain its monetary policy tightening approach due to rising inflationary pressures in Tokyo, which aligns with its economic forecasts. However, market participants are still uncertain about the timing of the next rate increase.

According to senior economist Stefan Angrick of Moody's Analytics, who spoke to CNBC via email, he believes there will be another rate hike in October. He predicts that this hike will be followed by at least one more in 2025, with a possible date of January.

Angrick predicted that Japan will likely experience "jumpy" inflation in the near future, citing government plans to cut energy subsidies. Despite Prime Minister Kishida's commitment to supporting household utility bills, he acknowledged that these measures cannot be sustained indefinitely.

Kazuo Momma, a former BOJ official and currently executive economist at Mizuho Research & Technologies, expects the central bank to keep the rate unchanged in October. His base case includes a hike in January to 0.5% and a further hike to 0.75% in July. Momma said that would take Japan's monetary policy to its final position in this tightening cycle.

In August, Tokyo's headline inflation rate increased to 2.6% from the previous year, surpassing the 2.2% increase in July. Additionally, the core inflation rate, which excludes food prices, rose by 2.4% from the previous year, exceeding the median market forecast and the July reading of 2.2%. This marks the fourth consecutive month of acceleration.

Despite Momma's statement that the momentum is not sufficient for the BOJ to increase rates, the central bank is cautious about rushing to do so due to global financial market risks.

Moody's Angrick stated that the upbeat monthly CPI data are being impacted by recent "policy flip-flops," which he referred to as several counter-effective policies being implemented. He explained that the government is providing some subsidies, but is also cutting back on other support measures. In his view, this shows a lack of commitment to providing effective support.

The upcoming Liberal Democratic Party election adds further uncertainty to the future policy course, according to Angrick, who stated that demand-driven price pressures have remained subdued and employment conditions are softening.

The jobless rate in Japan increased to 2.7% in July, from 2.5% in June, according to government data released on Friday. This was higher than what economists had predicted.

""In the worst-case scenario, rate hikes could lead to a broader economic downturn, while in the best-case scenario, they would only slow down growth," Angrick stated."

The Tokyo Consumer Price Index (CPI) is a key indicator of national trends and has been increasing due to rising wages, the government's efforts to end energy subsidies, and a weak yen.

Marcel Thieliant, Capital Economics' head of Asia-Pacific, stated in a client note that the underlying inflation should decrease to below 2% in the upcoming months.

In July, the BOJ shocked markets by increasing interest rates to 0.25%, which was the highest in 15 years, and announced plans to reduce its large-scale bond purchasing program.

If inflation persists in exceeding the BOJ's 2% target, Governor Kazuo Ueda of the central bank has stated that the bank is prepared to increase borrowing costs.