Japan Monetary Policy Watch : Mind the gap: Low-rate expectations vs. inflation risks

Research evidence excerpt

Japan Monetary Policy Watch : Mind the gap: Low-rate expectations vs. inflation risks

Deutsche Bank Group

Research

Japan Economics Date

Japan 18 May 2026

Japan Monetary

Policy Watch

Mind the gap: Low-rate expectations vs.

inflation risks

Kentaro Koyama, Ph.D.

The background to the BoJ's cautious stance Chief Economist

At its April Monetary Policy Meeting, the BoJ opted to hold its policy rate steady, +81-3-6730-0683

even as it revised its inflation forecast upward by more than the market had

anticipated. Until just before the meeting, we had expected a rate hike, and we still

believe that hiking in April would have been a prudent move considering future

risks.

Governor Ueda cited a decline in confidence regarding the outlook as the reason for

holding off, a point we find somewhat unconvincing. Furthermore, regarding the

timing of a rate hike after the US tariff hikes in 2025, the BoJ has delayed its timeline

to December, citing high uncertainty. This also deviates from our own forecast of an

October hike.

Several factors could explain the BoJ's cautious stance, including the judgment

that underlying inflation has not yet reached 2% and potential political pressure

from the government and ruling party. However, we believe the most critical factor

is the deeply rooted "low-rate expectations" among the public and corporations,

cultivated over many years of monetary easing.

The challenge of low-rate expectations for monetary policy

In our December 2024 report, "The Importance of Breaking Away from a "Breaking

out of the “low-rate mindset”," we noted that the expectation of continued low

interest rates persists among households, firms, and even parts of the financial

markets. If the policy rate were to be raised to, for example, 2% before these