Japan Economic Flash Likelihood of Accelerated Rate Hikes Not High

Economics Research 31 July 2026 | 7:32PM JST

Japan Economic Flash: Likelihood of Accelerated Rate Hikes Not High; We Continue to Expect the Next BOJ Rate Hike in January Next Year

n The Bank of Japan (BOJ) held its Monetary Policy Meeting (MPM) on July 30-31, Akira Otani | and, as was widely expected, decided to maintain its policy interest rate at 1% Goldman Sachs Japan Co., Ltd.

(by a majority vote). n Governor Ueda stated that with underlying inflation approaching 2%, the BOJ will place greater emphasis than before on upside risks to prices in its conduct of monetary policy. He added that the BOJ will examine upside risks to prices from the perspectives of the situation in the Middle East, the expansion of AI-related demand, and exchange rate fluctuations. These remarks are seen as suggesting that the assessment of the risk of underlying inflation exceeding 2% will be key for future rate hikes. n He explained that the BOJ will conduct monetary policy so as not to fall behind the curve, and indicated his recognition that the BOJ is currently not behind the curve. n For the pace of rate hikes to accelerate, it would likely require the BOJ to revise up its price forecasts and judge that the risk of underlying inflation exceeding 2% is heightening, but we judge this possibility to be low at present. For this reason, we continue to believe the BOJ will conduct gradual but steady rate hikes at intervals of around six months, and expect the next rate hike in January next year.

Likelihood of Accelerated Rate Hikes Not High; We Continue to Expect the Next BOJ Rate Hike in January Next Year 1. The BOJ held its MPM on July 30-31, and, as was widely expected, decided to maintain its policy rate guidance on the overnight call rate (TONA) at 1% (by a majority vote). Board member Mr. Hajime Takata voted against, proposing a rate hike to 1.25%. 2. Governor Ueda stated that with underlying inflation approaching 2%, the risk of underlying inflation exceeding 2% could be of a magnitude that cannot be ignored, and that the BOJ will place greater emphasis than before on upside risks to prices in its conduct of monetary policy. He added that the BOJ will examine upside risks to prices from the perspectives of the situation in the Middle East, the expansion of AI-related demand, and exchange rate fluctuations. These remarks are seen as suggesting that the assessment of the risk of underlying inflation exceeding 2% will be key for future rate hikes. 3. Governor Ueda also explained that with the yen having trended toward

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Goldman Sachs Japan Economic Flash

depreciation over the past year and corporate price-setting behavior becoming more active, the impact of exchange rates on prices is becoming larger, continuing to show vigilance against yen depreciation. 4. Regarding the risk of falling behind the curve, similar to Deputy Governor Uchida after the June meeting, he explained that the BOJ will conduct monetary policy so as not to fall behind the curve, and indicated his recognition that the BOJ is currently not behind the curve. 5. Taking the above into consideration, we continue to believe the BOJ will conduct gradual but steady rate hikes at intervals of around six months. This outlook is based on the assumption that the BOJ is not behind the curve and that the risk of underlying inflation exceeding 2% will not increase significantly. With the policy rate being continuously raised, assessment of the economy and prices and the outlook, as well as risk assessments, are likely to become more important in future decisions to raise interest rates. Because of this, we believe the actual timing of rate hikes is more likely to be at meetings where the Outlook Report is published (January, April, July, and October), when analysis on these issues has been accumulated within the BOJ and assessments have solidified. Therefore, we see a high likelihood of the next rate hike taking place in January next year. 6. The market has priced in a likelihood of over 70% for a…