BoJ Sees Room to Accelerate Rate Hikes Amid Building Inflation Pressures

The Bank of Japan (BoJ) has sufficient room to accelerate its rate hike cycle as inflation pressures build, according to ICICI Bank Research. The report cited rising producer prices and strong wage growth, which are beginning to pass on cost pressures to consumers.

Inflation expectations are increasing, despite the benign August consumer price index (CPI) print of 1.9% year-over-year, below the BoJ's 2% target. Producer price inflation rose 7.6% in August, while goods inflation increased 2.6%, reflecting higher imported costs amid 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%. The BoJ would continue to monitor the impact of the West Asian conflict, AI-related demand, and foreign exchange developments.