Japanese economy

18 September 2026, 11:22 UTC Chief Investment Office GWM Investment Research

BoJ: Not quite hawkish enough Japanese economy Authors: Kazumasa Ishii, Strategist, UBS SuMi TRUST Wealth Management Co., Ltd.; Chisa Kobayashi, Head CIO Japan Equity Strategy, UBS SuMi TRUST Wealth Management Co., Ltd.; Teck Leng Tan, CFA, Strategist, UBS AG Singapore Branch; Daiju Aoki, Chief Investment Officer Japan and Head Macroeconomics Japan, UBS SuMi TRUST Wealth Management Co., Ltd.; Jun Takahashi, Strategist, UBS SuMi TRUST Wealth Management Co., Ltd.

• The BoJ raised rates by 25bps to 1.25%, with two dissenting votes. Governor Ueda underscored the shift in the BoJ’s policy stance toward addressing upside risks to inflation, but his cautious tone disappointed hawkish market expectations.

• We maintain our forecast for two further 25bps hikes, in January and June 2027, bringing the policy rate to 1.75%. Although underlying inflation exceeded 2% in August, a possible slowdown in third-quarter GDP argues for a cautious pace of normalization. We also maintain our 12-month forecast for the 10-year JGB yield in the 2.9% range, although fiscal concerns or pricing of a higher terminal rate could temporarily push Source: iStock yields above 3%.

• We retain our USDJPY forecasts, but note that volatility is likely to remain substantial. We remain Attractive on Japanese equities, supported by AI- related capex, improving US manufacturing activity, corporate reforms, and continued BoJ normalization.

Overview of the Monetary Policy Meeting Outlook for the policy rate The Bank of Japan (BoJ) raised its policy rate by 25 We maintain our view that the BoJ will deliver two basis points this week, as widely expected. However, further rate hikes, bringing the terminal rate to 1.75%. two members, appointed by the Takaichi administration, Although headline inflation remained below 2% at 1.9% dissented, which surprised the market. in August, the underlying inflation measure that strips out policy-distorted items from the core measure (excluding At the press conference, Governor Ueda sought to strike a food and energy) rose from 1.9% in July to 2.1% in August, hawkish tone by emphasizing that the policy objective had above 2% for the first time since June 2024. In addition, shifted from bringing underlying inflation up toward 2% inflation is likely to accelerate as higher oil and gas prices to addressing upside risks to inflation above 2%. However, as well as AI-related price increases are passed through to he provided little guidance on the pace of future rate hikes domestic prices, meaning further rate hikes at least toward and expressed concern about the adverse effects of rapid the neutral level appear justified. monetary tightening on asset prices, sending mixed signals to the market.

As a result, the 10-year JGB yield edged up from 2.95% before the conclusion of the meeting to 2.98%, while USDJPY rose from 156.3 to 157.4 at the time of writing.

This report has been prepared by UBS SuMi TRUST Wealth Management Co., Ltd., UBS AG Singapore Branch. Please see important disclaimers and disclosures at the end of the document.

Chart 1 - Inflation likely to reaccelerate Chart 2 - Trade deficit widening due to rise in Consumer price index, %, y/y energy imports Trade balance, tr JPY

Source: Ministry of Internal Affairs and Communications, UBS Source: Ministry of Finance, UBS Our base case sees the next rate hike in January, although an increase in December remains a distinct possibility from a Fiscal policy developments currency-defense perspective, depending on developments Fiscal policy has so far followed a pragmatic path. at the Federal Reserve and the European Central Bank However, funding for higher defense spending and (ECB). Our view reflects the possibility that real consumption-tax cuts remains a key risk for the bond GDP growth in July-September could be broadly flat and foreign-exchange markets. On 31 August, government compared to April-June, or even turn negative depending ministries and agencies submitted their budget requests on developments in September. Retail activity remained for FY27 to the Ministry of Finance. The total amount weak through August…