Policy takeaways

The Bank of Japan delivered a well-telegraphed 25bp increase and reiterated that further moves are possible as its outlook plays out. The statement leaned more confident on the wage and price cycle, pointing to steady pay gains next year and a low risk of wage-setting momentum stalling, consistent with a sustained, moderate rise in prices.

Even so, the Bank maintained an explicitly accommodative stance. It stressed that real rates should remain significantly negative after the hike, with financial conditions still supportive for activity. In our view, that framing implies policymakers see the lower bound of neutral as north of 1%, while remaining unwilling to define it precisely.

Market reaction and desk view

Markets had looked for a more overtly hawkish signal on the path ahead. Instead, Governor Ueda kept guidance non-committal and played down the usefulness of pinning down the neutral rate range, focusing on monitoring transmission to the real economy. Key watchpoints include corporate funding conditions, bank lending, insolvencies, consumption and capex.

The lack of clear forward guidance likely drove a knee-jerk repricing, with 10-year JGB yields briefly moving above 2% and USD/JPY pushing towards 156. Our central case remains one additional 25bp hike, though not soon. We expect the next move in 2H26, with October 2026 our base case.

Looking ahead

• Inflation: Headline CPI should slip below 2% in 1H26 on energy measures and more stable food prices, while underlying inflation is likely to stay above 2%, keeping the BoJ’s tightening bias intact.

• Wages: Early signals point to another year of robust spring wage outcomes, broadly consistent with sustained domestic inflation pressure.

• FX as a trigger: If USD/JPY eases into the low-150s and below 155, we doubt the BoJ accelerates. A renewed weakening that lifts import prices could pull the next hike forward into 2Q26.

• JPY valuation and flows: Lower FX-hedging costs for Japanese investors and cheaper energy are supportive medium term, but carry demand and outward investment flows remain headwinds, leaving scope for renewed upside in USD/JPY into year-end and a higher sensitivity to policy or intervention risk.