We expect the policy rate to be left unchanged in the 23rd Jan BOJ MPM. BOJ will use this meeting to assess the impact of its latest rate hike on the economy, prices, and financial conditions. BOJ's outlook report will reflect yen depreciation since October 2025 and the government's economic stimulus package. We expect upward revisions to GDP forecasts, particularly for FY26. While we expect the BOJ to lower its CPI forecast for FY26 due to policy effects, we do not expect it to change its underlying inflation outlook. BOJ Governor Kazuo Ueda's post-meeting press conference will be closely watched for any hints on future hikes trajectory. We believe he will continue to avoid taking a hawkish stance in the sense of clarifying the terminal rate or the pace of rate hikes. We believe BOJ is significantly behind the curve and is now caught in a spiral of depreciating JPY, higher fiscal deficits & a still nascent economic revival. JPY depreciation is not only about the Takaichi trade. It is also about how BOJ has missed the bus and how significantly -ve real rates are in Japan. We are bearish on JPY for few months now and expect it to breach 160 sooner than later. Any MoF intervention might give only a brief respite. Eventually we won’t be surprised to see JPY test 185 too (chart below) if BoJ keeps on delaying the rate hikes which we believe is a real possibility. We don’t see the next hike coming before Dec’26 whereas the market is currently pricing in the next hike almost by June’26. On 10yr JGBs, we believe it is eventually headed towards 2.5% by June’26. Currently it is trading at 2.18%. From a political point of view, a general election is widely anticipated in early or mid-February. Campaign issues should crystallize once Prime Minister Takaichi officially calls the election, an announcement that could come as early as next week. Such pre poll promises as well as opinion polls might soon start pushing JPY above 160. There has been some new prepoll alliance formation against Takaichi but her approval ratings are way too high for her to lose the election in our view. Hence the fiscally expansionary policies are likely to remain in place pushing JPY to depreciate further.
