Goldman Sachs Sees September Rate Hike as Bank of Japan Eyes Inflation Expectations

Goldman Sachs has surprisingly brought forward its expectation for a Bank of Japan rate hike to September, from January 2027. According to Tomohiro Ota, a Japan economist at Goldman Sachs, this change is due to medium- to long-term inflation expectations approaching the 2% target and pressure from yen depreciation.

The exchange rate has become the most urgent variable for the Bank of Japan, replacing wage data. If the USD/JPY exchange rate breaches the 160 level, maintaining the current policy stance would be seen as tacit approval of currency weakness, further driving up inflation expectations.

Inflation expectations are approaching 2%, putting pressure on the gradual pace of rate hikes. The Bank of Japan's Comprehensive Inflation Expectations Index is now close to 2%. This implies that even if some price pressures can still be attributed to external shocks, it is becoming increasingly difficult for the central bank to underestimate the risk of rising inflation expectations.

The yen has become a critical variable for the September meeting. Estimates show that a 10% depreciation of the yen would push up the year-on-year new core CPI by approximately 0.4 percentage points after 12 months; if the USD/JPY rises by about 5 yen, the direct impact on inflation would be slightly above 0.1 percentage points.