Why Japan’s next rate decision could be bigger than the hike itself?
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E-mailInvesting.com -- The Bank of Japan is expected to raise its policy rate by 25 basis points to 1% at its June 15-16 policy meeting, with financial markets already largely pricing in the move and attention shifting to signals about the pace of future tightening.
Bank of America said the central bank's increasingly hawkish rhetoric since its April meeting has lowered the bar for further rate increases by placing greater emphasis on upside inflation risks rather than linking policy tightening solely to economic growth. Recent comments from board members and Governor Kazuo Ueda have reinforced expectations of a June hike as inflation pressures broaden across the economy.
While markets assign a near-certain probability to a June move, investors are looking for clues on whether the BOJ could accelerate its tightening cycle. Current market pricing implies roughly two additional rate hikes by the end of 2026 and a terminal rate near 2%, though Bank of America believes investors remain unconvinced the central bank can sustain a faster pace of increases.
Bank of America maintained its baseline forecast for gradual tightening after June, projecting additional 25-basis-point hikes in October 2026, March 2027 and July 2027, taking the terminal policy rate to 1.75% by the end of 2027. The firm warned that stronger-than-expected inflation could force the BOJ to raise rates more quickly or to a higher terminal level.
The June meeting will also include a review of the BOJ's government bond purchase reduction program. Bank of America expects policymakers to maintain the current pace of reductions through March 2027 before pausing further cuts, a move it believes would have limited market impact.
For currency markets, the firm said a more hawkish-than-expected message could trigger yen short-covering and push dollar-yen toward 157, while a dovish outcome could reignite yen weakness and increase the likelihood of official intervention if the exchange rate moves into the 161-164 range.
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