Japan: Bank of Japan resumes tightening cycle in June
BOJ hikes rates to highest since 1995: At its meeting on 16 June, the Bank of Japan (BOJ) decided by a seven-to-one vote to raise its policy rate by 25 basis points to 1.00%. The move, which was broadly in line with market expectations, took the policy rate to its highest level since 1995.
Inflation risks drive the decision: The BOJ’s decision was driven by mounting upside risks to inflation from the Iran energy price shock. Deputy Governor Uchida highlighted that higher crude costs have begun feeding through to business-to-business transactions, raising the risk that consumer prices could increase across a wider range of items. As a result, the Bank judged that underlying inflation could overshoot its 2.0% target in the medium term.
That said, the one dissenting vote by board member Asada underscored concerns that the spillovers from the Middle East conflict could weigh more heavily on economic activity and employment than they lift inflation.
Further tightening remains likely by the end of 2026: Most of our panelists expect one more hike by year-end, in line with the BOJ’s forward guidance of more tightening and above-target inflation through late 2027.
That said, a sizeable minority see rates remaining on hold, and the BOJ is expected by most analysts to stand pat at its 30–31 July meeting. The hurdle for additional tightening has risen: The recently announced U.S.-Iran peace deal has tempered energy prices, wage growth is not feeding through strongly to services inflation, and the board has become more dovish following Asada’s dissent and the arrival of Sato—an incoming member with a likely dovish voting profile. Risks are tilted toward additional hikes if the Iran war resumes or if the food consumption tax is suspended later than expected.
Panelist insight: Alvin Liew and Jester Koh, analysts from the United Overseas Bank, said:
“Post-June rate hike, the BOJ has maintained the forward guidance of further rate hikes, although the continued normalization path ahead will be contingent on inflation and Middle East developments. As such, we now expect BOJ to remain in a period of pause (in 3Q) before resuming monetary policy normalisation, with another 25bps hike to 1.25% in late 4Q26. Thereafter, we project another 25bps in late 2Q27 to 1.50% which we believe will be the terminal rate.”
Goldman Sachs’ Akira Otani commented:
“January 2027 is still our base-case scenario for the next rate hike. However, uncertainty over the timing of the next rate hike is high. With underlying inflation approaching 2%, even small changes such as further modest yen depreciation, could significantly increase the risk of it exceeding 2%. For this reason, the probability distribution around the timing of the next rate hike is seen as skewed toward earlier rate hikes.”