BoJ Hawkishness Ignites Hope for Rate Hike

Japan's economy is at a crossroads as rising domestic inflation, yen weakness, and high energy prices have led to a reduction in overweight positions in 10-year Japanese Government Bonds (JGBs). The Bank of Japan (BoJ) has revised its median core CPI estimate downward to 2.5%, compared to the 2.8% previously estimated.

The BoJ projects that core inflation will hover around 2.4% in FY27 and 2.0% in FY28, suggesting a progressive anchoring around the official long-term target of 2%. To address cost-of-living concerns, Japan has announced plans to reduce the consumption tax on food from 8% to 1% starting in April 2027.

The BoJ kept its policy rate unchanged at its July 30-31 monetary policy meeting, but the Outlook Report contained several hawkish elements. The market-implied probability of a hike at the September meeting has increased, with Governor Ueda's statements suggesting the possibility of a faster pace of rate hikes.