Japan faces further BoJ rate hikes—but how much?
The Bank of Japan (BoJ) kept its policy rate at 0.75% at its January meeting. Although our current baseline expects a final rate hike to 1% in mid-2026, the bank could move earlier if the yen weakens further.
We plan to add one or two more rate hikes in our February forecast update in view of the persistent yen weakness. Expansionary fiscal policy, together with higher productivity as a result of the recent GDP revision, will also increase our estimate of the neutral rate.
The BoJ upgraded its growth projection for the 2026 fiscal year in its Quarterly Outlook Report, shifting its risk assessment to neutral from tilting to the downside. The bank revised up its inflation outlook and showed more confidence in its forecast, stating that inflation expectations will rise and stay “at around 2 percent in the second half of the projection period”.
The BoJ’s communication has become more hawkish, but only marginally. It reiterates that it will continue to raise the policy rate if economic and inflation data tally with its forecast, which is becoming more probable as shown in the outlook report. Governor Ueda also mentioned strong credit growth to prove room for rate hikes.
We expect the snap election in February to increase the need for more rate hikes by making expansionary fiscal policy more likely, regardless of the outcome. The government will accept the BoJ’s gradual interest rate normalisation in return for avoiding a sharp rise in long-term yields and a depreciating yen.
