Nomura predicts a high likelihood of continued Bank of Japan (BOJ) tightening through 2027, with a 60% probability assigned to three additional rate hikes by mid-2027. This would increase the BOJ's policy rate from the current 0.75% to 1.50%, a level not seen since 1995, marking a significant departure from Japan's long period of ultra-loose monetary policy. These increases are expected to occur at a measured pace, with hikes penciled in for June 2026, December 2026, and June 2027, reflecting sustained underlying inflation pressures while the BOJ maintains caution regarding the speed of tightening due to Japan's sensitivity to higher borrowing costs and global growth risks.
The forecast assumes gradual improvements in wage growth, supported by tight labor market conditions and structural labor shortages, and inflation remaining above levels consistent with policy neutrality. Nomura does not anticipate a rapid or front-loaded hiking cycle, as the BOJ is expected to prioritize financial stability, aiming to avoid destabilizing bond markets or causing excessive yen volatility.
In a more hawkish alternative scenario, assigned a 40% probability, Nomura sees the BOJ delivering four rate hikes by the end of 2027, pushing the policy rate to 1.75%, a level last observed in 1993. This scenario would require stronger and more persistent inflation dynamics, firmer wage gains, and clear indications that Japan's economy can absorb higher interest rates without hindering growth. Nomura's analysis highlights that while downside risks still exist, the balance of BOJ risks has shifted toward the possibility of higher terminal rates if domestic inflation proves more resilient than anticipated, suggesting markets may need to increasingly price in a higher long-term policy rate for Japan.
