Japan markets: A hawkish 25bps rate hike most likely
BOJ to hike.
Group Research - Econs, Eugene Leow9 Sep 2026
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It is almost a done deal that the Bank of Japan will hike rates at the upcoming meeting on Sep 17-18. Recent data strongly support the case for a rate hike. Final 2Q GDP confirmed that the economy continued to grow at an on-trend pace of 1.4% QoQ saar, or 0.9% YoY, in 2Q. July wage data also surprised on the upside, with total wages and base wages rising 4.7% and 4.1% YoY, respectively. Meanwhile, underlying inflation measures, including CPI excluding fresh food, energy and institutional factors and trimmed mean CPI, have converged with the 2% price target, rising 2.2% and 2.0% YoY, respectively, in July.

The most likely outcome is for the BOJ to deliver a hawkish 25bps hike while signalling a flexible pace of rate hikes at future meetings. An outsized 50bps hike at this meeting or back-to-back rate hikes at every meeting is not our base case. While BOJ board member Takata recently mentioned the possibility of an outsized rate hike, he is well known as a hawk and does not represent the majority view. More importantly, the BOJ should remain mindful of the market impact of large policy surprises, given that the unexpected rate hike in July 2024 triggered a massive JPY carry-trade unwinding and jitters across global financial markets.

The risk of carry-trade unwinding and excessive market volatility should not be underestimated if the BOJ were to surprise markets this time. Short-term outward loans under Japan’s international investment position stood near the record high at JPY119tn as of 2Q, while the assets of inter-office accounts held by foreign banks based in Japan also stood near the record high at JPY14tn as of July. Markets have braced for a September rate hike but not outsized or back-to-back moves. The swap market has fully priced in a 25bps hike to 1.25% at the Sep 17-18 meeting, but assigns only a 40% probability to another 25bps hike to 1.50% by December. Against this backdrop, the BOJ should be mindful that a larger-than-expected policy move could trigger excessive market volatility, particularly if the Sep 15-16 FOMC meeting does not provide a clear signal of Fed tightening.

Ma Tieying 馬鐵英, CFA

Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
matieying@dbs.com



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