Bank of Japan Watch Rate hike and taper pause

Research evidence excerpt

Bank of Japan Watch Rate hike and taper pause

Economics ● Japan

10 June 2026

Taken together, these developments point to a very high likelihood of a hike on 16 June −

potentially with a unanimous vote. Our recently updated forecasts see the BoJ conducting a

25bp rate rise in June, followed by another 25bp hike in December that will bring the

policy rate to 1.25% by year-end (see Updating our forecasts: More hikes, and sooner, 28

May 2026). At the time of writing, OIS markets are pricing close to two full 25bp hikes this year,

with the implied probability of a June hike above 90%.

Like many economies, Japan faces a stagflationary dilemma from the Middle East conflict:

downside risks to growth and upside risks to inflation. In his last MPM press conference,

Governor Ueda repeatedly highlighted these dual risks. That being said, the Takaichi

administration’s fiscal expansion will support growth. In fact, a recently enacted JPY3trn

(0.4% of GDP) supplementary budget will fund emergency gasoline subsidies introduced after

the Middle East conflict, as well as summer electricity and gas subsidies, which should cushion

household spending (see Japan Economics Comment, 31 May 2026; Chart 1).

With fiscal policy bolstering growth, the BoJ’s focus naturally shifts towards upside inflation

risks. At first glance, Japan’s inflation may not look especially concerning given that April’s CPI

surprised to the downside across the board (see Japan CPI, 22 May 2026). Yet government

subsidies have masked underlying inflation pressures, particularly in energy. For example, core

CPI stripped of institutional factors has risen steadily since the Middle East conflict began on

28 February, reaching 2.8% y-o-y in April, versus 1.4% for standard core CPI (see Chart 2)