Japanese households' inflation expectations rise, Bank of Japan rate hike expectations remain

Japanese households' inflation expectations rose in the three months to March, a Bank of Japan survey showed on Friday, putting pressure on the central bank to raise interest rates further.

The survey, along with growing recent signs that businesses are shaking off their long-standing aversion to rising prices and wages, suggests domestic economic conditions are building for further rate hikes.

But analysts say the Bank of Japan may not raise rates at its next policy meeting on April 30-May 1 due to heightened market volatility caused by higher U.S. tariffs and global recession fears.

"Domestic economic and price conditions are moving in line with the Bank of Japan's view," said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities.

"But Trump's tariff shock has heightened uncertainty about the outlook," she said, pushing back by six months the Bank of Japan's forecast for its next rate hike to January 2026.

As many as 86.7% of households expect prices to rise in a year, the Bank of Japan survey showed, up from 85.7% in a December survey and the highest level since June 2024.

The report said 83.5% of all households surveyed between Feb. 6 and March 4 expected prices to rise in five years, up from 82.5% in the December survey.

Households expect prices to rise an average of 12.2 percent in one year, up from 11.5 percent in the previous survey, and 9.6 percent in five years, up from 9.2 percent in the December survey.

Their expectations, as usual, are well above Japan's headline inflation rate, which hit 3.7% in February.

"Recent increases in food and gasoline prices may have affected households' views on the price outlook," Bank of Japan officials said at a briefing.

The Bank of Japan ended its aggressive stimulus program last year and raised interest rates to 0.5% in January as it believes Japan is close to achieving its 2% inflation target sustainably.

Bank of Japan Governor Kazuo Ueda said the central bank was ready to continue raising interest rates if the economic recovery continued and urged companies to raise wages and prices.

He said rising inflation expectations among households and businesses were a key prerequisite for further rate hikes.

While rising living costs would boost inflation expectations and help the Bank of Japan raise interest rates further, it could backfire and hurt consumption and the broader economy.

Many households said they were spending more on groceries and less on dining out and leisure activities, suggesting they were feeling the pinch of rising living costs.

Government surveys released earlier this week showed sentiment in the services sector deteriorated for a third straight month in March, while consumer confidence fell to its lowest level in two years.

With a July Senate election approaching, lawmakers have begun pressuring the administration to take steps to cushion the economic blow from U.S. tariffs and rising living costs.