Japan Economic Notes: Overview of the next week

Research evidence excerpt

Japan Economic Notes: Overview of the next week

15 May 2026

Japan Economic Notes

However, we sense a considerable gap between forecasts by the markets and

international institutions on the one hand, and the actual view of economists and

market participants on the other. We expect the policy rate to reach 1.25% in

January 2027 and remain at that level for some time thereafter. We see

considerable hurdles to a 2% rate. Our impression in interactions with numerous

market participants is that a vanishingly small minority truly expects a policy rate of

2% in two years' time.

This impression is further corroborated by the results of the ESP Forecast Survey for

May on 15 May (conducted from 28 April to 11 May). An examination of the

responses from 36 economists reveals that only a small minority anticipate a 2%

rate by end-2027, and the wide distribution of forecasts suggests that no clear

consensus has yet emerged. BoJ policy board member Kazuyuki Masu presented

a broad estimated range of 1.1%-2.5% for the nominal neutral rate in a recent

speech, but most economists appear to believe that the rate will remain confined

to the lower end of that range at end-2027. On the other hand, if the BoJ were to

seriously move to curb inflation in the future, it might be necessary to raise interest

rates to the upper half of the range at an early stage. The divergence between the

rate levels implied by the market’s forward curve and the prevailing view among

economists could become a source of volatility in financial markets going forward.

Next week’s indicators

n 1Q 2026 GDP (19 May): We expect positive real growth of an annualized

1.3% QoQ. Government measures to curb electricity and gas costs should

help hold down inflation and thus boost purchasing power, and we suspect