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

The Bank of Japan (BoJ) has ample room to step up its rate hikes, according to a report by ICICI Bank Research. Rising producer prices, strong wage growth and hints of cost pressures being passed to consumers suggest underlying inflation rates are accelerating. Although August's Consumer Price Index (CPI) remained relatively tame at 1.9% year-on-year, core inflation, excluding fresh food and energy, also stayed below the BoJ's 2% target.

However, producer price inflation climbed 7.6% in August, while goods inflation increased 2.6%, reflecting higher import costs due to a weaker yen.

Strong wage growth is further fueling inflation expectations. Japanese nominal wage growth averaged 3.5% in 2026, with real wages also showing positive gains. The BoJ's focus remains on price stability, with Governor Ueda expressing concern that the central bank may be lagging in response to rising inflation. Ueda emphasized that the BoJ aims to avoid scenarios like those in the US and Europe during their 2022 high-inflation periods.

Nonetheless, higher energy prices are dampening Japanese growth. Despite this, the economy is expected to stay buoyed by AI-related demand, rising corporate profits, and resilient consumption. The report anticipates another 25 basis point rate hike in 2026, followed by at least one more increase in 2027, pushing the policy rate to 1.75%. The BoJ will continue monitoring the impact of the West Asian conflict, AI's influence on demand, and currency developments.

Despite these tightening measures, the yen's position remains weak. The report expects the USD/JPY exchange rate to hover between 157 and 161 in the near term and continue depreciating over the medium term.