BOJ Has Room to Accelerate Rate Hikes Amid Building Inflation Pressures

The Bank of Japan has room to accelerate its interest rate hike cycle as inflationary pressures continue to build, according to ICICI Bank Research. The report cited rising producer prices and strong wage growth as evidence that underlying inflation is stronger than it appears in the latest consumer price index (CPI) data.

In August, CPI and core inflation remained below the Bank of Japan's 2% target, but producer price inflation rose 7.6% and goods inflation increased 2.6%, indicating higher imported costs due to yen depreciation.

The report expects another 25 basis point rate hike in 2026, followed by at least one additional hike in 2027, taking the policy rate to 1.75%. This would aim to prevent a wage-price spiral and keep inflation expectations in check.