Expectations are growing that the BOJ's rate hikes will be brought forward, with a hike expected at the September meeting followed by additional hikes before year-end. Accordingly, the policy rate is expected to rise to 1.25%, then increase gradually to 2.25% by the end of 2027.
Market expectations are strengthening that the BOJ will bring forward a rate hike to its September meeting, with the probability of a September hike seen at a high 74%. Two hikes are expected by year-end, amounting to approximately 3.4 hikes on a cumulative basis. As a result, the 2-year-ahead interest rate outlook is expected to rise to around 2.4%.
The outlook for the BOJ's future rate-hike pace is based on expectations that the Nikkei 225 will trade at approximately ¥72,000 over the next 12 months and USD/JPY at approximately ¥155. Under market participants' expectations, the BOJ's policy rate is projected to reach 1.25% in September and 2.25% by year-end.
Concerns about accelerating inflation are influencing the outlook for the BOJ and inflation. Data from the BOJ Tankan survey show that companies expect inflation one year ahead to be +2.7% and their own selling prices to rise by +3.7%, both relatively high levels, highlighting the strength of price pass-through. This is regarded as a factor that could accelerate inflation and a source of concern.
After the rate hike expected from September onward, additional hikes every 3–4 months are expected to become the standard, with this pace projected to continue through the end of 2027. The terminal rate is expected to be around 2.25–2.5%. While the author believes that changes in the composition of the BOJ's Policy Board will have a limited impact, he points out that attention should be paid to how personnel changes affect policy.