JPM The BoJ s Catch 22

J P M O R G A N Japan Economic Research 18 August 2026

• We bring forward our call for the next BoJ hike from October to Economic and Policy Research September Ayako Fujita ( • We now also expect a December hike, raising our end-2026 policy rate forecast to 1.5% JPMorgan Securities Japan Co., Ltd. • Assuming no major shift in the fiscal stance, we expect three hikes in 2027 (Apr/Jul/Dec), taking the policy rate to 2.25% by end-2027 We bring forward our outlook for the timing of the BoJ’s next rate hike from October to September. The BoJ leadership members would likely prefer to maintain its stance of proceeding with rate hikes in a gradual manner, carefully assessing the impact on the economy where possible. However, markets have already largely priced in a September hike, and postponing a hike at this juncture would instead carry a high risk of destabilizing markets. In light of this risk balance, it appears that an early policy adjustment has become increasingly unavoidable.

We have long warned that the BoJ is at risk of falling behind the curve, and this concern has been further heightened by the government’s signal toward fiscal expansion. Although government subsidies are keeping inflation prints seemingly low, the composite index of inflation expectations that we track as underlying inflation has already reached the mid‑2% range. Judged against economic fundamentals, the current level of the policy rate is clearly too low. It is therefore a natural step to neutralize monetary policy by accelerating rate hikes to some extent.

That said, hiking rates at the September meeting may not be an easy decision for the BoJ. If the BoJ proceeds with an additional hike only three months after the June hike, it could be seen as a departure from the BoJ’s policy approach to date— namely, “implementing hikes gradually while carefully assessing their impact on the economy.” Moreover, a September hike in the absence of sufficient economic data to evaluate the effects of the June hike could give markets the impression that the BoJ was compelled to raise rates in response to yen depreciation. With “behind the curve” concerns already strongly in focus, if the perception spreads that the central bank raised rates as a currency response, pressure from markets for further hikes could persist beyond September, making uncertainty over the timing of hikes more likely to rise.

From a longer-term perspective, if the government shifts toward fiscal expansion while carrying a stock of public debt at levels unprecedented among other countries, there may be limits to how much market stability can be achieved through a more aggressive BoJ hiking path alone. If the BoJ accelerates rate hikes to prevent further yen depreciation, the government’s interest expenses would rise more than previously assumed, raising the risk of further increasing fiscal concerns in the JGB market. For market stability, policy messaging from the government to dispel fiscal concerns may be more important than BoJ rate hikes; however, at present, no notable change is evident in the government’s messaging. As a result, even if the BoJ—which has thus far shown strong consideration for the administration—were to hint at the possibility of accelerating rate hikes in the near term, it remains unclear whether it could stabilize both JGB and the fx markets

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Ayako Fujita Japan Economic Research ( August 2026 JPMORGAN

This environment raises the difficulty of the BoJ’s policy communication going forward. With substantial uncertainty still surrounding the neutral rate, if the BoJ pivots toward rate hikes as a response to yen weakness, the BoJ will likely find it hard to anchor market expectations. As a result, for the time being, rate hikes will likely be repeated in a manner effectively prompted by markets, and uncertainty over the timing of hikes could also rise more easily.

Based on the above, we now expect the yen’s depreciation to prompt an early BoJ rate hike, not only in September but also in December, and we therefore raise our forecast for the policy rate at end‑2026…