The Bank of Japan may accelerate its rate hike pace after the elections - Bank of America Securities

Investing.com - Japanese Prime Minister Sanae Takaichi has now gained public authorization to revitalize the country’s economy, prompting Bank of America Securities to revise its expectations for the pace of potential rate hikes by the Bank of Japan.

The Liberal Democratic Party led by Sanae Takaichi won more than two-thirds of the seats in the House of Representatives on Sunday, allowing her to push forward her agenda freely without negotiating with other parties or seeking approval from the House of Councillors.

“We have revised our forecast for the Bank of Japan’s rate hikes,” said a Bank of America Securities analyst in a report on February 10. “Previously, we expected the next rate hike to occur at the June monetary policy meeting (MPM), followed by hikes approximately every six months, reaching a final rate of 1.5% by the end of 2027.”

“Under our new forecast, we now expect the next rate hike to occur at the April monetary policy meeting, with subsequent hikes every four to five months, reaching a final rate of 1.75% by the end of 2027 (we now forecast hikes of 25 basis points in April 2026, September 2026, January 2027, and July 2027).”

The revision is based on a significant change in the Bank of Japan’s assessment of risks to the economic and inflation outlook since last fall.

As the “core inflation rate” approaches 2% and downside risks to the economy diminish, the Bank of Japan has become more cautious about inflationary pressures driven by yen depreciation.

“The Liberal Democratic Party’s overwhelming victory in the House of Representatives election is also expected to reinforce this view,” added Bank of America.

The bank indicated that the Bank of Japan might raise the policy rate from the current 0.75% to 1.0% in April, based on first-quarter economic data, results from spring labor-management negotiations for fiscal year 2026, and the April price revision.

A rate hike in March is also possible, but without supporting data, it would mainly be aimed at curbing yen depreciation and would only occur if the dollar/yen exchange rate remains around 160 yen after foreign exchange interventions.

Subsequent rate hikes could also accelerate from the previously assumed “every six months” to “every four to five months.”

" The biggest risk to our outlook for Bank of Japan rate hikes comes from developments in the global economy and/or the foreign exchange market. Further yen depreciation would lead to earlier hikes, while yen appreciation or a slowdown in the global economy would prompt more cautious increases," added Bank of America.

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