JGB Strategy Weekly

14 September 2026 Fixed Income | Japan Strategy Weekly

Rates Strategy Weekly "Could BOJ return to “standard” pace of tightening following September hike?"

Noriatsu Tanji Chief Bond Strategist This report is a translation of excerpts from a Japanese-language report published on 11 September 2026 and is based on information available at that time.

Yuhi Kawano Market Analyst (1) Could BOJ return to “standard” pace of tightening following September hike? With a September BOJ rate hike viewed as a near-certainty—the market has almost fully priced in a 25bp increase in the policy rate—subsequent developments in yen rates, particularly in the short- and medium-term sectors, are likely to depend on the pace of future rate hikes. While we expect the post-September pace of tightening to be heavily influenced by exchange rate developments, our base-case scenario calls for a return to one hike every six months, with the next rate rise coming in March 2027. However, some think it will be difficult to slow the pace of tightening given the potential for a retreat in rate hike expectations to put renewed downward pressure on the yen. In this report, we provide a supplementary assessment of whether a return to the BOJ’s previous pace of tightening following a September hike would be realistic from the perspective of managing the exchange rate. First, we considered the extent to which near-term rate-hike expectations have influenced USD/JPY. We used the 1y-forward 1m OIS rate as a proxy for short-term policy-rate expectations in Japan and the US, with USD OIS priced off the federal funds rate. Chart 1.1 presents a simple regression of USD/JPY on the spread between 1y-forward 1m OIS rates in the US and Japan. The results appear to indicate a modest correlation, suggesting that near-term policy-rate expectations may have affected the exchange rate to some extent. Naturally, exchange rates are driven by various factors other than policy-rate expectations, so this estimate is only a rough approximation, but it should be helpful in identifying the broad direction of the relationship between the two.

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Chart 1.1. 1y-forward 1m USD–JPY OIS spread vs. USD/JPY (USD/JPY) 166

y-forward 1m USD–JPY OIS spread, %) Source: Compiled by Mizuho Securities Fixed Income Research from Bloomberg data

Next, we considered the impact of an increased likelihood of the BOJ returning to a tightening cadence of “once every six months” after September. The 1y-forward 1m JPY OIS rate is currently trading around 2%. If the market fully priced in a scenario of continued 25bp rate hikes every six months following a September hike, we estimate the rate would decline by some 25bp from its current level. (Our baseline scenario is that the BOJ will ultimately end its tightening cycle as early as mid-2027, with the policy rate peaking at 1.5%, but we expect the market to be pricing in continued tightening when the Bank initially returns the pace of tightening to one rate hike every six months.)

Applying this to the relationship shown in Chart 1.1, and assuming the 1y-forward 1m USD OIS rate is unchanged, we estimate USD/JPY would rise by a little less than 3 yen, indicating a weakening of the Japanese currency vs. the dollar. While this impact would not be insignificant, the authorities may be willing to tolerate it—at least temporarily—given the yen’s substantial recent appreciation. Naturally, position adjustments and other factors could amplify the move in the event of a major and rapid repricing. However, this would not necessarily be the case if expectations can be gradually unwound.

Our base-case scenario has the Federal Reserve forgoing rate hikes both this year and next. In that case, we project that US rate hike expectations would also retreat, sending the 1y-forward 1m USD OIS rate—which is currently some 67bp above the effective federal funds rate—lower. If…