MUFG on BoJ Rate
We continue to expect the BoJ to raise the policy rate to 1.50% at the December 2026 meeting and to 1.75% at the April 2027 meeting, thus completing its adjustments to “the degree of monetary accommodation." Maintaining a three- month interval between tightening moves would imply the hike at the December 17-18 meeting would be followed by another at the March 17-18 meeting next year. But given the increased sensitivity of deposit and mortgage rates to rate hikes, we think the Bank would probably prefer to avoid raising rates immediately before the fiscal year-end. As such, the April Outlook Report meeting, at which the BoJ will first present its forecasts for FY29, seems a more natural choice. Moreover, consumers may defer purchases of nonperishable processed foods in March if the consumption tax cut takes effect in April 2027, and retail price developments in the wake of the tax cut also remain uncertain. By the April 27-28 meeting, the Bank would have had more opportunities to gather anecdotal evidence on post-tax-cut consumption and retail price trends, thus providing a stronger justification for its policy decision. The upside risk scenario for the terminal rate relative to our
We continue to expect the BoJ to raise the policy rate to 1.50% at the December 2026 meeting and to 1.75% at the April 2027 meeting, thus completing its adjustments to “the degree of monetary accommodation." Maintaining a three- month interval between tightening moves would imply the hike at the December 17-18 meeting would be followed by another at the March 17-18 meeting next year. But given the increased sensitivity of deposit and mortgage rates to rate hikes, we think the Bank would probably prefer to avoid raising rates immediately before the fiscal year-end.
As such, the April Outlook Report meeting, at which the BoJ will first present its forecasts for FY29, seems a more natural choice. Moreover, consumers may defer purchases of nonperishable processed foods in March if the consumption tax cut takes effect in April 2027, and retail price developments in the wake of the tax cut also remain uncertain. By the April 27-28 meeting, the Bank would have had more opportunities to gather anecdotal evidence on post-tax-cut consumption and retail price trends, thus providing a stronger justification for its policy decision.
The upside risk scenario for the terminal rate relative to our forecast is one in which demand and supply shocks combine to lift underlying inflation, prompting the BoJ to continue raising rates even after real rates turn positive. In the downside risk scenario for the terminal rate, where the Bank stops tightening at 1.25% or 1.50% or pauses its rate hikes, prolonged instability in global financial markets increases the downside risks to economic activity. In this regard, we intend to keep a close eye on global developments in equities and exchange rates.