JPY: Bank of Japan's future hikes anticipated – ING

ING's Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE, and Min Joo Kand, Senior Economist, discuss the Bank of Japan's recent 25bp hike and the outlook for future rate increases. The report emphasizes the BoJ's confidence in achieving its inflation target while maintaining a cautious stance on forward guidance. The analysis suggests that while further hikes are expected, they are not imminent, with a potential timeline extending into 2026.

Future rate hikes not imminent yet

"The Bank of Japan opted for a widely expected 25bp hike and kept the door to future hikes open, though Governor Kazuo Ueda's comments were rather neutral on forward guidance. The November CPI matched market expectations, with persistent inflation pressures intact. We expect a further 25bp hike by the BoJ, though only in next year's second half."

"The meeting statement shows growing confidence about sustainable inflation in several places, with comments like 'firms will continue to raise wages steadily next year', 'the risk of firms’ active wage-setting behaviour being interrupted is expected to be low,' and 'the mechanism by which both wages and prices rise moderately will be maintained.'"

"Thanks to government subsidies on energy and falling rice prices, headline inflation is likely to drop below 2% in the first half of 2026. However, core inflation, excluding fresh food and energy, is expected to decelerate only marginally, in turn remaining well above 2%."

"We do prefer USD/JPY coming lower next year as FX hedging costs tumble for Japanese holders of US debt securities. Using the three-month forwards, FX hedging costs have now dropped to 3.22% per annum from 4.15% at the start of the year and from a peak of 6.00% in late 2023."