Friday’s rate hike by the BOJ was in line with market expectations. Policy board members Toichiro Asada and Ayano Sato—both appointed by Prime Minister Sanae Takaichi—voted against the rate hike, arguing that the policy rate should not be changed. None of the members argued for a 50bp hike, which some market participants had been concerned about. In our main scenario (60% probability), we see two expected additional rate hikes in Dec’26 & Mar’27. We now forecast a terminal rate of 1.75% in our main scenario from the previously expected 2% terminal rate. There was no sign of BOJ becoming more hawkish than before in Ueda's press conference. More rate hikes are likely to come but they wont be back to back in base case scenario. But we do think that due attention needs to be given to the rise in crude oil prices, and particularly in the Dubai crude spot price, which tends to have a substantial impact on the Japanese economy, If energy prices remain elevated at current levels for more than 6 months then we can see a 25 bps hike every 3 months leading to a terminal rate of 2% but this event has 30% probability. The last minuscule probability of 10% is for an event where BOJ does back to back hikes in Oct & Dec each which seems unlikely considering the 7-2 voting in Friday's meeting.
