Doha, April 11 (QNA) - Qatar National Bank (QNB) expects the Bank of Japan (BOJ) to embark on a sustained monetary tightening cycle, marking a decisive shift away from decades of ultra-loose policy shaped by deflationary pressures.
In its weekly report, QNB said Japan has entered a new monetary phase not seen in nearly three decades, following the BOJ's decision to raise its benchmark interest rate to 0.75% in December. The move reflects a broader transition toward a more conventional macroeconomic environment, supported by rising wages and firmer inflation dynamics.
The report noted that underlying price drivers remain on an upward trajectory, reinforced in part by the depreciation of the Japanese yen, which has weakened beyond 160 per dollar -- its lowest level since 2014. The weaker currency has pushed up import and energy costs, feeding through to domestic prices and intensifying inflationary pressures.
Core inflation indicators, which exclude volatile components such as energy and fresh food, continue to exceed the BOJ's 2% target, underscoring the persistence of price growth.
QNB identified three key factors supporting further policy tightening. First, the strengthening wage-price cycle is gaining traction. Japan's 2026 spring wage negotiations, known as "Shunto," delivered increases of between 5% and 7%, marking a third consecutive year of robust wage growth.
Data from Japanese Trade Union Confederation (Rengo) showed average wage demands of nearly 6% across more than 2,500 unions, pointing to a structural shift in corporate wage-setting behavior and rising service-sector inflation.
Second, the BOJ's updated estimate of the neutral interest rate -- defined as the level that neither stimulates nor restrains economic activity -- suggests further room for gradual tightening. The central bank now places the nominal neutral rate in a range of 1.1% to 2.5%, reflecting improving potential growth. With the policy rate currently at 0.75%, even modest increases would leave monetary conditions accommodative, supporting the case for additional hikes.
Third, external factors -- particularly elevated energy prices linked to geopolitical tensions -- are adding to inflationary pressures. The escalation of the Middle East conflict has triggered a surge in oil prices, posing a direct challenge for Japan, which imports around 90% of its crude oil from the region. Higher energy costs are expected to feed into broader consumer prices, reinforcing the need for policy normalization.
Recent communications from the BOJ indicate a growing inclination toward further tightening, with policymakers signaling that sustained, energy-driven inflation could warrant additional rate increases.
QNB concluded that the convergence of a strengthening wage-price dynamic, an accommodative policy stance relative to the neutral rate, and rising external inflationary pressures is likely to drive the BOJ toward continued rate hikes.
The report added that market expectations point to a policy rate increase to around 1% by mid-2026, with the terminal rate potentially reaching between 1.25% and 1.5%, depending on wage trends, energy prices and currency movements. (QNA)