MNI POLICY: Risk BOJ Accelerates Hikes Mid-2026

The Bank of Japan would be prepared to increase the pace of hiking from its current expected six-month cycle should data around the middle of next year point to a pick-up in inflation and wage growth, something which officials consider to be a real possibility, particularly if yen weakness persists, MNI understands.

Barring any significant negative market reaction following U.S. jobs data later on Tuesday, the BOJ is widely expected to hike the policy rate for the first time since January on Friday, raising it by 25 basis points to 0.75%, the highest since 1995. While bank officials have no set period for determining the impact of higher rates as they feed through the economy, they consider that real rates will remain low after this week’s meetings, leaving room for further increases. (See MNI BOJ WATCH: Board To Consider Hike, Maintain Half-year Pace)

Governor Kazuo Ueda is likely to avoid any additional hawkish tilt in his language on Friday for fear of sending market rates higher, but the risk that a weak yen and pricier imports will add to retail price inflation is very present in officials’ minds, even though they are aware that some firms will be cautious about raising their prices given continued higher consumer saving rates. Another key data point will be the fourth revision of wage hikes by Japanese Trade Union Confederation Rengo available by mid-April.

STUBBORN EXPECTATIONS

While food price inflation is slowing and core CPI inflation could fall below an annual 2% as predicted in the BOJ’s October outlook report, the core-core measure is likely to stay above that level, with officials considering that businesses and households’ price expectations are stubborn and may be anchored around the Bank’s 2% target. 

Only 1,044 food items are likely to see price rises from January-April 2026, the lowest number since 2022, according to a survey by Teikoku Databank. 

Bank officials are also closely monitoring how higher rates affect corporate borrowing and bank lending, and whether it feeds though to any increase in bankruptcies or dampens capital and housing investment. The BOJ’s December Tankan survey indicated that smaller firms are postponing implementation of capital expenditures due to labour shortages and high material costs, though major firms are optimistic they will implement their spending plans. (See MNI POLICY: BOJ To Keep Neutral, Terminal Rate View)