Doha, June 27 (QNA) - Qatar National Bank (QNB) expects the Bank of Japan (BoJ) to continue gradually normalizing monetary policy in the coming quarters as inflation becomes more entrenched, inflation expectations remain elevated, and policymakers face mounting upside risks from external shocks and exchange rate movements.
In its weekly economic commentary, QNB said the balance of risks remains tilted toward further policy tightening despite the BoJ's gradual approach to normalization. It noted that policy rates remain at the lower end of estimates for the neutral interest rate, suggesting that monetary conditions may still be accommodative, while financial markets and analysts expect the benchmark policy rate to gradually rise toward 1.5% over the medium term.
QNB noted that on June 16, the BoJ raised its benchmark policy rate by 25 basis points to 1%, the highest level since 1995, marking another significant step in Japan's exit from the ultra-loose monetary policies that dominated much of the past three decades. The move follows the normalization process launched in early 2024, when the central bank ended its negative interest rate policy and began a series of rate increases.
According to the report, the tightening cycle reflects a fundamental shift in Japan's inflation dynamics. After years of struggling to achieve its 2% inflation target despite highly accommodative monetary policy, the BoJ has seen underlying price pressures strengthen, driven by post-pandemic supply shocks, stronger wage growth and rising inflation expectations.
These developments, QNB said, have increased policymakers' confidence that inflation can be sustained around the central bank's target, reducing the need for extraordinary monetary accommodation.
The report identified three key factors that are likely to shape the future course of monetary policy in Japan: the country's transition to a more persistent inflation environment, the impact of external shocks and exchange rate movements on inflation, and the extent to which policy rates may still need to increase to reach a neutral level.
QNB said Japan's shift to a more persistent inflation regime strengthens the case for further policy normalization.
It noted that while inflation had remained below the BoJ's 2% target for much of the past decade due to weak domestic demand, subdued wage growth and entrenched low inflation expectations, recent data point to a more durable rise in inflation.

The report highlighted that core inflation has remained above target for an extended period, while households and businesses have adjusted to a higher inflation environment. Medium-and long-term inflation expectations have also risen to around 1.5% to 2%, their highest sustained levels in decades.
QNB added that inflationary pressures are no longer driven solely by temporary supply-side factors. Annual wage settlements exceeded 5% in both 2025 and 2026, representing the strongest wage growth in more than three decades. Supported by a tight labor market and robust corporate profitability, higher wages have boosted domestic demand, while businesses have become increasingly willing to pass higher costs on to consumers, reinforcing underlying inflationary pressures.
The report also pointed to external shocks and exchange rate dynamics as key upside risks to inflation. It noted that Japan remains heavily dependent on imported energy and raw materials, making it particularly vulnerable to fluctuations in global commodity prices and disruptions to international trade.
QNB said the conflict in the Middle East has increased uncertainty in energy markets, raising concerns over the inflationary effects of higher oil prices. Reflecting these risks, the BoJ revised its 2026 core inflation forecast upward to a range of 2.5% to 3.0% at its April policy meeting, from 1.9% previously, while noting that higher crude oil prices were being passed through to consumer prices at a relatively rapid pace.
The report added that the Japanese yen has remained weak by historical standards, increasing the domestic cost of imported goods, particularly energy and food. As inflation becomes more entrenched, policymakers are expected to pay closer attention to the inflationary effects of persistent currency weakness and imported price pressures.
QNB further argued that despite the recent tightening cycle, Japan's monetary policy may still be accommodative. The BoJ estimates the country's neutral interest rate at between 1.1% and 2.5%, suggesting that the current policy rate of 1% remains below the level required to fully normalize monetary conditions.
Moreover, the report noted that real interest rates remain negative because inflation continues to exceed nominal policy rates, indicating that monetary policy is still providing support to economic activity. As a result, QNB expects the BoJ to maintain a tightening bias, even if the pace of policy normalization remains gradual. (QNA)