Change to Our BoJ Call

Research evidence excerpt

Change to Our BoJ Call

UpdateMinflation, which is approaching 2%, could exceed the target, supported by improving

real wages going forward. In addition, strong global demand for AI and

semiconductors has limited the deterioration in Japan’s terms of trade relative to

expectations, reducing the risk that weaker corporate profits could cause wage

growth to lose momentum in next year’s Shunto wage negotiations. If rate hikes

toward a neutral policy setting are delayed, the risk of sharp yen depreciation and a

rise in long-term interest rates could increase.

Our view: Compared with many macro investors, who appear to expect a faster pace

of rate hikes and a terminal rate of 2% or higher, our forecast of only one rate hike

in 2027 may still appear cautious. We agree that the risk of a stagflation-like

slowdown this year has diminished. However, we are not yet convinced that

underlying inflation is as strong as the BoJ argues ( Exhibit 1 , Exhibit 2 ). In addition,

given the high share of Japanese households with variable-rate mortgages, and the

possibility that lending rates linked to banks’ short-term prime rates and corporate

bond funding costs could rise with a lag after increases in short- and medium-term

interest rates, we believe the effects of higher interest rates may become more

visible only gradually from next year onward. Taking into account the replacement

of two Policy Board members in July 2027, we believe the hurdle for further BoJ rate

hikes is likely to rise gradually.

Risks: Developments in the Middle East remain a risk to our outlook. If concerns

about a slowdown in the global economy increase, the timing of future rate hikes

could be delayed.

Exhibit 1: Decomposition of YoY growth in the BoJ’s Japan-style core CPI (ex.