BoJ preview: Hawkish hold
The desk anticipates a hawkish hold from the Bank of Japan (BoJ) at its upcoming meeting, following September's hike to 1.25%. The central bank's growth and inflation outlook will be pivotal, particularly if CPI forecasts for FY27 and FY28 exceed the 2% threshold, which could pave the way for further rate increases in 2027. Per the full note from ing-think, market pricing currently assigns an 80% chance of a 25bp hike in December, suggesting heightened sensitivity around the BoJ's communications this week, especially in light of arch-hawk Hajime Takata's potential dissent on voting for a back-to-back hike.
What the desk is arguing
The desk frames this as an opportunity for the BoJ to reiterate its commitment to tightening monetary policy in response to persistent inflation risks. The outlook report due to be released is of particular interest, with previous forecasts indicating an inflation rate of 2.6% for FY27. Should the October update reflect stable inflation expectations, it would bolster support for expectations of rates rising towards 1.75-2.00% next year.
Moreover, the recent stability in inflation expectations, as evidenced by the September Tankan report showing a slight dip in business inflation projections, suggests that the BoJ may maintain its hawkish stance without hiking rates at this meeting. The market's attention on potential dissenting votes from more hawkish members like Takata underscores the uncertainty surrounding the direction of future policy.
Where it sits in our coverage
Our consensus target for USD/JPY stands at 156.0, with a range of 149.0000 to 161.7145 by December 2026. Notably, BNP Paribas and Rabobank have projected targets of 148.00 and 145.00 for the same date, respectively. This divergence suggests a comparatively bullish stance in our projections relative to some market peers.
How other firms see it
Firms like Mizuho and CIBC are aligned with our bullish outlook, targeting 163.0 and 159.1950 for March 2026, signaling a consensus for a weaker yen. In contrast, HSBC projects a significantly lower target of 145.00 for December 2026, representing a more pessimistic view on the yen's trajectory. The focus should also consider the implications of the BoJ's decision on USD/JPY and wider monetary policy across major central banks.
What the calendar says
With no imminent high-impact events scheduled on the calendar for Japan, market attention will remain fixed on the October 30 BoJ meeting, where any hint of policy divergence could sway expectations and positioning leading into the December decision.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The BoJ is expected to hold rates steady at 1.25% but may lean hawkish in its communication.
- 02Potential changes in inflation forecasts for FY27 and FY28 could signal a shift toward higher rates in 2027.
- 03Market pricing reflects a strong expectation of a December hike, indicating trader sensitivity to BoJ messaging.
- 04Arch-hawk Takata's voting patterns will be closely watched for hints of a policy shift.
Market implications
Traders should monitor USD/JPY movements, particularly if the BoJ indicates a commitment to further rate hikes. The upcoming policy guidance could prove pivotal in either confirming or challenging existing rate hike expectations. A decisive move above 157.00 in USD/JPY may reinforce bullish sentiment in the lead-up to December.
Risks to this view
A reversal in the BoJ's hawkish stance could stem from unexpected weakness in inflation data or significant dissent among the board members against further hikes. Furthermore, geopolitical risks or stronger-than-expected economic data from the U.S. could lead to a re-evaluation of USD/JPY positions.
USD/JPY — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Morgan Stanley | Bearish | 170.00 |
Standard Chartered | Bullish | 152.00 |
Scotiabank | Bullish | 140.00 |
Articles BoJ preview: Hawkish hold Published 10:40 Japan Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download After September’s policy rate hike to 1.25%, the Bank of Japan is expected to deliver a hawkish hold tomorrow. In focus will be the release of the October outlook report featuring the latest forecasts for growth and inflation. CPI projections above 2% for FY27 and FY28 should support expectations of rate hikes to 1.75-2.00% next year Chris Turner Bank of Japan headquarters in Tokyo Price expectations well above 2% Having hiked rates by 25bp to 1.25% in September, the central messages from the BoJ were largely similar; upside price risks remained, real interest rates were still negative and further policy rate hikes should be expected.
Perhaps the only reason that a rate hike is not expected at this 30 October meeting is that the BoJ has never delivered back-to-back rate hikes since it was given monetary policy independence in 1998. A hike in October could therefore smack of urgency. Behind a widely expected unchanged decision will be a focus on the voting pattern.
Did arch-hawk Hajime Takata again dissent in favour of back-to-back hikes? His vote for a hike would not be a surprise. Anyone joining him would.
More interest will be had in the October outlook report. The July report was pretty hawkish in that the median forecast for core (all items less food and energy) inflation for FY27 and FY28 were 2.6% and 2.2%, respectively. Let’s see how they change in the new release.
Perhaps one comfort for the BoJ is that inflation expectations do not seem to have worsened. The September Tankan report showed business expectations for inflation fractionally dipping from the highs, with PPI also showing early signs of topping out. BoJ Tankan price expectations stabilise Source: Bank of Japan "> Source: Bank of Japan Market reaction Markets currently price in an 80% chance of a 25b rate hike in December and then another 50bp by next September.
While government representatives may well want the BoJ to go slow with its tightening, the case against the BoJ taking rates up to the 1.75-2.00% area is a weak one. Here the BoJ remains concerned with a weak yen, broadening AI demand and elevated energy prices. There does not seem an obvious case for a big move in market rates or the yen on the back of Friday’s BoJ decision.
A hawkish Fed keeping USD/JPY bid in a broad 157-159 range into year-end is our current view. One low-probability, high-impact risk for Friday is any announcement from Japan’s GPIF pension on re-allocating funds domestically. We made the case in this article that a greater allocation to domestic securities would help the government’s huge investment drive.
Sources & References
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Cross-firm research
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