BOJ: Gradual tightening with higher inflation risks – UOB

United Overseas Bank’s Alvin Liew reports the Bank of Japan (BoJ) left its policy rate at 0.75% but signalled that the next move will be a hike as underlying inflation nears target and real rates stay very low. The BoJ sharply revised Consumer Price Index (CPI) forecasts higher and now sees growth risks skewed down and price risks skewed up, particularly in FY2026, while stressing a cautious, data-dependent normalization path.

Higher CPI and cautious normalization

"Forward guidance was subtly hawkish: underlying inflation is nearing target, real rates remain very low, and policy normalization will continue, but cautiously and data-dependently."

"In its forward guidance on monetary policy found in the latest Outlook report, the BoJ conveyed the message that the next move will be an increase in rates but without giving insights on when the next hike will take place or its preferred terminal rate."

"According to the Outlook, “given that underlying CPI inflation has been approaching 2 percent and real interest rates are at significantly low levels, the Bank will continue to raise the policy interest rate and adjust the degree of monetary accommodation, in response to the developments in economic activity and prices as well as financial conditions."

"Underlying inflation is projected to rise gradually and reach levels consistent with the 2% price stability target between late FY2026 and FY2027 and remain around that level thereafter."

"The BoJ in its assessment in the Apr Outlook report, now consider growth risks are skewed downward, price risks are skewed upward, especially in FY2026."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)