Yen Depreciation Expected Despite BoJ Rate Hikes

BNP Paribas strategists are warning of a slowdown in Japan's economic growth due to higher inflation and energy-related costs. The Bank of Japan (BoJ) is expected to continue hiking interest rates, lifting them to 2.50% by 2028. Despite this tightening monetary policy, the yen is predicted to weaken further against the US dollar.

The BoJ began a cautious process of adjusting its monetary accommodation in 2024, raising the policy rate to 1.0%, the highest since 1995. Strategists expect a 25bp hike every four to five months until the terminal rate is reached. This could lead to higher long-term rates and further pressure on Japan's public debt.

The impact of these economic pressures will be felt in 2026, with GDP growth expected to slow to 0.8% from 1.1% in 2025. The yen's depreciation against the dollar is also forecast, reaching a price of 165 by Q4 2026.