Japan Macro Watch: Inflation acceleration will come anyway

Research evidence excerpt

Japan Macro Watch: Inflation acceleration will come anyway

Global Research

19 June 2026ab

Japan Macro Watch Economics

JapanInflation acceleration will come anyway

Go Kurihara

Associate Economist

UBS expects an October rate hike go.kurihara@ubs.com

+81-3-5293 3000

This week, the Bank of Japan (BoJ) raised its policy rate from 0.75% to 1.0%, in line with

expectations. It also decided to stop reducing government bond purchases by March

next year. Our estimates suggest that the BoJ’s balance sheet—previously an outlier

among major economies—will shrink from 98% of GDP to around 38% by 2034,

broadly converging with Europe if plans proceed as intended. Deputy Governor Uchida’s

press conference was neutral, and market reaction was muted.

We see no need to change our call for an October rate hike. Although oil prices have

stabilized with normalization in the Strait of Hormuz, cost pass-through is already visible

(e.g., in corporate prices), and underlying inflation may still surprise to the upside. A

quick estimate based on the latest oil futures curve suggests only a slight downward

revision. On growth, both firms and households remain solid, and improved conditions

from easing geopolitical risks could further support inflation. Our FY2026 growth

forecast is at 0.8%, above the BoJ (0.5%) and consensus (0.6%). USDJPY is also under

upward pressure, supporting the case for tightening. A Bloomberg survey shows most

BoJ watchers expect a hike this year, with 52% expecting December and 36% October.

May CPI stable, but likely to accelerate despite Strait of Hormuz normalization

May Core CPI held steady at 1.4%YoY, as slower food inflation (down from 4.1% to

3.5%) offset higher energy prices following the end of utility subsidies. A rebound in