BoJ Review: 25bps As Expected
The BoJ hiked rates to 0.5% in the Dec 18th meeting
As per forecast, the BoJ has hiked rates by 25bps in the December meeting and bring short term interest rate to 0.75%. The forward guidance is straight forward in reinforcing their stance towards more rate hike if economic/inflation development aligns with their playbook but the timeline remain ambiguous. In contrary to the 7-2 vote to hold in October, the December decision is unanimous and suggest all members are now seeing sustainable inflation will be reaching its target of 2%.
Optimistic signs from the 2026 spring wage negotiation seems to have boosted BoJ's confidence in their forecast. They believe the pace of wage growth in 2026 will remain steady as corporate profit is forecasted to be at a high level. The risk arising from tariffs has been reduced, despite a level of ongoing uncertainty, should not be significantly affecting Japanese business. The business price/wage setting behavior is transiting at a pace favorable by the BoJ and supports BoJ's future rate changes.
The real interest rate is still low in BoJ's eyes. Therefore, they will be comfortable to further increase interest rate if the traction of business price/wage setting behavior persists, which translates into sustainable inflation. However, they hints at a lower CPI in the first half of 2026 due to transitory factors fading and government stimulus. From there onwards, the BoJ seem inflation to pick up from impact of labor shortage and see sustainable inflation target to be around the corner by year end 2026.
We believe it could mean one more rate hike somewhere between Q2/Q3 2026 to bring rates to 1% and this is likely to be the terminal rate. Unless the dynamic of price/wage setting change, the BoJ could leave rates at 1% for a medium term.