After the Liberal Democratic Party won a large majority in the House of Representatives, Japanese Prime Minister Sanae Takaichi enjoys strong political support. This prompted Bank of America to review its expectations regarding raising interest rates in Japan, anticipating a faster pace than before.
According to an analysis note issued by the bank on February 10, previous expectations were for the next rate hike at the June meeting, followed by a hike “once every six months,” bringing the final interest rate to 1.5% by the end of 2027. But the bank’s new estimates expect an early hike at the April meeting, then increasing the pace to a hike every “4 to 5 months,” with the final interest ceiling raised to 1.75% by the end of 2027.
“Bank of America” provides a clear vision of the increase schedule, which includes a 25 basis point increase in April 2026, then September 2026, then January 2027, and finally July 2027. The bank attributes this shift to a change in the Bank of Japan’s assessment of the risk balance since last fall. With “core inflation” approaching 2% and recession risks receding, the bank has become more concerned about the risks of higher inflation that a weak yen might fuel.
The bank expects the Bank of Japan to raise interest from 0.75% currently to 1.0% in April, based on first-quarter data, the results of annual wage negotiations for fiscal year 2026, and rate reviews in April.
The report also does not rule out the possibility of an interest rate hike in March, but it essentially links this possibility to continued pressure on the yen, with the main goal being to stop its decline, and that is only if the dollar/yen exchange rate remains close to 160 even after possible intervention in the exchange market.
Regarding risks, Bank of America believes that they are limited to two external factors: the global economic situation and exchange market developments. The continued decline of the yen may lead to a faster and earlier rate hike, while its rise or a slowdown in the global economy may impose a more cautious approach to tightening monetary policy. (investing)
