We believe coordinated US-Japan currency intervention marks a turning point and are making a significant revision to our BoJ policy outlook. We had assumed the BoJ would limit itself to gradual rate hikes of once every six months to align with the dovish Takaichi administration, and that the terminal rate would remain below the neutral rate at 1.5%. However, we now believe the coordinated intervention has effectively freed the BoJ from the constraints imposed by the administration, enabling it to pursue a more aggressive rate hike path. Accordingly, we are bringing forward our next rate hike forecast from December to September, and we expect the BoJ to continue hiking in Dec’26, June’27, and December’27, with the policy rate reaching 2% by the end of next year. The risk of more aggressive hikes remains, depending on Fed policy. Our new main scenario (60% probability) assumes four rate hikes, in September 2026, Dec’26, June’27 & Dec’27. In what we see as the more likely risk scenario A (25% probability), we assume rate hikes in September 2026, December 2026, March 2027, and June 2027 in view of the increased risk of higher-than-expected inflation as a result of yen depreciation. Together with our main scenario, this gives a probability of 85% for a rate hike in September 2026. In our less likely risk scenario B (15% probability), we assume only two rate hikes in October 2026 and Mar’27. Going forward, the primary focus will be on how quickly the BoJ can proceed with rate hikes—without causing significant damage to the real economy or equity markets—in order to contain excessive yen depreciation and upside inflation risks. BOJ's outlook for next year is heavily dependent on Fed policy. Our view is that the Fed is likely to be on hold for a long time with the next rate action a cut than a hike, but should the Fed enter a rate hike cycle contrary to our forecasts the BoJ could be compelled to adopt a faster pace of hikes (e.g., once every three months) and the terminal rate could exceed 2%. To summarise, BOJ is likely to focus on JPY depreciation led inflation and respond hiking by 50 bps in REMCY26. Terminal rate now looks 2% rather than the previous 1.5% estimates. Takaichi administration & US treasury together will force BOJ to leave it’s dovish stance & focus on real interest rates which are deeply -ve.
