BOJ Shifts Policy Focus as Interest Rate Hikes Loom

The Bank of Japan (BOJ) is expected to raise interest rates again in December 2026, followed by another hike in April 2027, according to Daiwa Securities economist Kenji Yamamoto. The central bank lifted its policy rate to 1.25% this month, and Yamamoto believes it will continue tightening at a pace of roughly one hike per quarter towards a peak of around 2%. The key shift, he says, is in the BOJ's objective. With underlying inflation now close to 2%, the task is no longer to lift inflation towards target but to hold it there and prevent an overshoot.

The BOJ will now weigh upside and downside risks to inflation equally, a change that was well telegraphed by Governor Kazuo Ueda in his post-meeting press conference. Ueda gave four reasons for the September hike: a worsening situation in the Middle East, stronger than expected AI-related demand, elevated inflation expectations, and firm wage data.

Oil is a central concern, with Ueda describing a second wave of energy-driven price increases arriving before the first had fully worked through to consumer prices. If crude stays high, Yamamoto sees a growing chance that the BOJ raises its core inflation forecasts for this fiscal year and next in its October Outlook Report.