- Capital Economics expects BoJ to raise rates again in October, lift policy rate to 2% by end-2027
The Bank of Japan is expected to continue monetary tightening after raising its policy rate to 1%, the highest level in 31 years, as inflation risks remain tilted to the upside, economists told Anadolu.
The BoJ raised its policy rate from 0.75% to 1% after its two-day policy meeting, in line with market expectations. The decision was passed by a 7-1 vote.
In its statement, the bank said high crude oil prices were exerting downward pressure on economic activity, while Japan’s economy continued to be supported by high corporate profits and improving employment and income conditions.
The bank said it had concluded that it would be appropriate to adjust the degree of monetary accommodation to achieve its 2% price stability target in a sustainable and stable manner.
The BoJ also said it would reduce its planned monthly purchases of Japanese government bonds by about 200 billion yen ($1.38 billion) each quarter until the January-March period of 2027.
Policy rate still negative in real terms
The Dutch bank ABN AMRO's senior economist Arjen van Dijkhuizen said the rate hike was expected and consistent with the BoJ’s cautious tightening cycle.
“This move was expected by us, as it fits within our view that the Bank of Japan is following a very gradual and cautious rate hike path,” he said, noting that the previous 25-basis-point rate hike came half a year ago.
“The move was also in line with the consensus expectation, and fully priced in by financial markets,” he added.
Van Dijkhuizen said the fact that the policy rate had been raised to its highest level in 31 years “perhaps says more about the very accommodative policies of the past than over the current policy stance.”
“In real terms, the policy rate is still negative, as Japan’s latest reported number for core CPI inflation was 1.9% for May 2026,” he said.
Capital Economics sees rates rising to 2% next year
Capital Economics Asia-Pacific head Marcel Thieliant said the BoJ is likely to accelerate tightening over the coming months.
“The Bank of Japan lifted its policy rate to a three decade high today and we expect the Bank to accelerate the pace of tightening over the coming months,” Thieliant said.
He noted that the rate hike had been well signaled, while the bank maintained its existing plan to reduce bond purchases until March 2027.
“As we had correctly anticipated, the Bank stuck to its existing plans for reducing its bond purchases until March 2027 but will keep them steady at 2 trillion yen ($12.4 billion) per month thereafter,” he said.
“That level is low enough to secure a decline in its balance sheet for years to come,” he added, noting that the BoJ expects its Japanese government bond holdings to fall by 36%-39% by 2030 compared with their 2024 peak.
Thieliant said the policy statement showed that downside risks to growth had eased.
“The statement noted that ‘the risk of a significant slowdown appear to have decreased somewhat compared with a while ago’,” he noted.
However, he added that the decision was not unanimous, as Board member Toichiro Asada was the only voting member in favor of keeping rates unchanged, while Governor Kazuo Ueda was absent from the meeting due to hospitalization.
Thieliant said board composition could become an issue for the policy outlook, as Asada was appointed by Prime Minister Sanae Takaichi, who is known for dovish views on monetary policy.
“Given that the term of arch-hawk Junko Nakagawa ends this month and the terms of two other hawkish Board members will end in July 2027, it’s possible that their replacements could tilt the Board in a more expansionist direction,” he said.
He said the BoJ’s hawkish tone may appear difficult to reconcile with Japan’s recent inflation data, as headline inflation stood at 1.4% in April, partly due to capped fuel prices, while inflation excluding fresh food and energy was 1.9%.
“However, the Bank warned that the pass-through of higher crude oil prices ‘has been progressing at a relatively fast pace in business-to-business transactions, which could spread to an increase in consumer prices across a wide range of items’,” he said.
Thieliant said Capital Economics expects inflation to accelerate to 3.5% by early next year.
“With the Bank warning about upside risks to inflation, we expect it to hike again at its October meeting and lift rates to 2% by the end of next year,” he said.
“That forecast is more hawkish than what investors are anticipating,” he added.
*Writing by Mucahithan Avcioglu
