BOJ May Shift to Aggressive Inflation-Fighting Stance by December 2026

Former Bank of Japan official Tsutomu Watanabe predicts that the BOJ may shift to an inflation-fighting stance as early as December 2026. This could lead to interest rate hikes being accelerated to quarterly intervals, according to Watanabe.

Rising underlying inflation and wage growth are expected to force the central bank to abandon its current policy tolerance. Watanabe notes that Japan is facing a third wave of inflation, driven by the Middle East conflict.

The first two waves were triggered by the Russia-Ukraine war and domestic wage increases, while the latest wave is expected to be milder, with consumer inflation excluding fresh food and fuel peaking near 3% in March next year before easing toward the BOJ's 2% target.

Watanabe warns that underlying inflation pressures are becoming a bigger concern, with price trends moving closer to the central bank's target. A tight labour market, rising wages, and stronger inflation expectations are contributing to persistent price pressures.