Japan Economic Flash Continue to Expect Next Rate Hike in January Next Year

Economics Research 18 September 2026 | 11:25PM JST

Japan Economic Flash: Continue to Expect Next Rate Hike in January Next Year

n The Bank of Japan (BOJ) held its Monetary Policy Meeting (MPM) on September Tomohiro Ota | 17-18, and as was widely expected, decided to raise its policy rate guidance on Goldman Sachs Japan Co., Ltd. the overnight call rate (TONA) by 25 bp to 1.25% (by a 7-to-2 majority vote). n Governor Ueda stated that with the underlying inflation rate approaching the target, it has become important to anchor underlying price rises at 2% and thus prevent them from deviating upward above 2%, expressing the view that ‘the policy phase has changed’ in that sense. n Furthermore, Governor Ueda noted that financial conditions remain accommodative even after this rate hike, suggesting the BOJ’s stance is to continue raising rates. However, he pointed out that the degree of accommodation will diminish as the policy rate rises, and that rapid rate hikes have negative aspects such as inducing adjustments in bank lending and asset prices. n In addition, Ueda reiterated the view that the BOJ has not fallen behind the curve at this point. He also pointed out that sizeable rate hikes (larger than 25bp) and consecutive rate hikes are envisaged in situations where the inflation rate overshoots (or is highly likely to overshoot), such as the phase of rapid price increases in the US and Europe immediately after the COVID-19 pandemic, thereby expressing a negative view on consecutive rate hikes or other means of further accelerating the pace of hikes. n We continue forecasting the timing of the next rate hike to be in January 2027. However, as long as the BOJ continues to emphasize the upside risks to underlying prices, the timing of the rate hike could be brought forward in response to heightened inflation risks, such as rapid yen depreciation, meaning risks are skewed toward an earlier rate hike.

1. The BOJ held its MPM on September 17-18, and, as was widely expected, decided to raise its policy rate guidance on the overnight call rate (TONA) by 25 bp to 1.25% (by a 7-to-2 majority vote). Board members Toichiro Asada and Ayano Sato dissented, proposing to maintain the policy rate. 2. At the post-meeting press conference, BOJ Governor Kazuo Ueda said the rate hike was made bearing in mind the upside risks to prices, such as the spill over of higher crude oil prices to a wide range of items. 3. When asked about the reason for the faster pace of rate hikes, Governor Ueda expressed the view that the policy phase has changed. In other words, monetary

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Goldman Sachs Japan Economic Flash

policy had so far been conducted in order to raise the underlying inflation rate toward 2%, but as the underlying trend of prices approaching 2%, it becomes important to anchor underlying prices around 2% so that the risk of overshooting 2% does not materialize. However, regarding the pace of rate hikes, he added that he does not have a specific pace in mind such as once every three months. 4. In addition, the Governor said financial conditions remain accommodative even after this rate hike, suggesting the BOJ’s stance is to continue to raise rates. However, he pointed out that the degree of accommodation will diminish as the policy rate rises, and stated that the BOJ is looking at three factors—interest rates, bank lending, and asset prices—to grasp the degree of accommodation in financial conditions. The Governor also pointed out the negative side of rapid rate hikes potentially inducing adjustments in bank lending and asset prices. 5. On the other hand, regarding the possibility of large rate hikes or consecutive rate hikes going forward, the Governor said it depends on whether prices are high above the inflation target, or have already exceeded the target, citing the US and Europe in 2022-23 as specific examples. He then reiterated his view that the BOJ has not fallen behind the curve, suggesting the BOJ thinks a further acceleration in rate hikes (e.g., via…