BoJ has room to accelerate rate hikes as inflation pressures build: Report

The Bank of Japan has sufficient room to accelerate its rate hike cycle as rising producer prices, strong wage growth and growing signs of cost pressures being passed on to consumers point to stronger underlying inflation, ICICI Bank Research said in a report.

The report said the latest inflation data remained relatively benign, but government subsidies have helped contain the impact of higher energy prices on consumers, potentially masking underlying price pressures.

"While inflationary pressures have remained benign in the August CPI print, inflation expectations are continuing to rise," ICICI Bank Research said, citing rising producer prices and the beginning of a wage-price spiral.


Headline consumer inflation and core inflation, excluding fresh food and energy, remained at 1.9 per cent year-on-year in August, below the Bank of Japan's 2 per cent target. However, producer price inflation rose 7.6 per cent in August, while goods inflation increased 2.6 per cent, reflecting higher imported costs amid yen depreciation.

The report said the strong wage trend could further reinforce inflation expectations. Japanese nominal wage growth has averaged 3.5 per cent in 2026, while real wages have also recorded positive gains.

It said the BoJ's policy guidance remains focused on price stability and that Governor Ueda's comments indicated concerns about the central bank falling behind the curve on inflation. Ueda said the BoJ wanted to "avoid a situation like that in the US and Europe" during the 2022 period of high inflation.

At the same time, the report said higher energy prices are acting as a drag on Japanese growth. The economy is nevertheless expected to remain supported by AI-related demand, rising corporate profits and resilient consumption, with growth expected to pick up if crude oil prices ease.

The report expects another 25 basis point rate hike in 2026, followed by at least one additional hike in 2027, taking the policy rate to 1.75 per cent. It said the BoJ would continue to monitor the impact of the West Asian conflict, AI-related demand and foreign exchange developments.

Despite the policy tightening, the yen's outlook remains weak, with the report expecting USD/JPY to trade in the 157-161 range in the near term and continue to depreciate over the medium term.