BoJ Has Room to Speed Up Rate Hikes as Price Pressures Build: Report
ICICI Bank Research says the Bank of Japan can accelerate its rate hike cycle, expecting a 25 bps hike in 2026 and more in 2027, taking the policy rate to 1.75%.
The Bank of Japan has enough headroom to accelerate its cycle of interest rate increases, as rising producer prices, firm wage growth and signs that companies are passing on higher costs to consumers point to stronger underlying inflation, ICICI Bank Research has said in a report.
According to the report, the latest inflation reading appeared relatively contained, but government subsidies have softened the effect of costlier energy on households, possibly masking underlying price pressures. While inflationary pressures stayed benign in the August CPI print, inflation expectations are continuing to rise, it noted, pointing to higher producer prices and the start of a wage-price spiral.
Headline consumer inflation and core inflation, which strips out fresh food and energy, both held at 1.9 per cent year-on-year in August, below the Bank of Japan's 2 per cent target. Producer price inflation, however, climbed 7.6 per cent in August, and goods inflation rose 2.6 per cent, reflecting higher imported costs amid a weakening yen.
The report said strong wage trends could further entrench inflation expectations. Japanese nominal wage growth has averaged 3.5 per cent in 2026, with real wages also posting positive gains.
It added that the central bank's policy guidance remains centred on price stability, and that Governor Ueda's remarks suggested concern about the BoJ falling behind the curve on inflation. Ueda said the BoJ wanted to avoid a situation like that in the US and Europe during the 2022 period of high inflation.
Higher energy prices, meanwhile, are acting as a drag on Japanese growth. The economy is still expected to remain supported by AI-related demand, rising corporate profits and resilient consumption, with growth likely to pick up if crude oil prices ease.
The report expects another 25 basis point rate hike in 2026, followed by at least one more in 2027, taking the policy rate to 1.75 per cent. It said the BoJ would keep monitoring the impact of the West Asian conflict, AI-related demand and foreign exchange developments.
Despite the tightening, the yen's outlook remains weak. The report expects USD/JPY to trade in the 157-161 range in the near term and to continue depreciating over the medium term.