JPMorgan: Risk of Bank of Japan Rate Hike in September Significantly Increases
JPMorgan believes that tax cuts and expanded fiscal support by the Japanese government could boost demand, exacerbate inflationary pressures, and further intensify the pressure on the Bank of Japan to tighten monetary policy. Although the probability of a rate hike in September has risen, the bank maintains its forecast for an October hike, as premature action could trigger market bets on consecutive hikes, forcing the central bank to deviate from its gradual pace
Fiscal expansion is reshaping the path of Japan's monetary policy.
In a report released on August 7, JPMorgan stated that the Japanese government's push for tax cuts and expanded fiscal support will further increase the pressure on the Bank of Japan (BOJ) to tighten monetary policy. Against the backdrop that fiscal stimulus may boost economic demand and exacerbate inflation risks, the bank believes the BOJ may accelerate the pace of future rate hikes.
Although the probability of a September rate hike has risen significantly in recent weeks, JPMorgan maintains its baseline forecast of an October hike and has raised its projected number of rate hikes in 2027 from two to three, expecting the BOJ's policy rate to reach 2% by the end of 2027.
Meanwhile, JPMorgan warned that Japanese Prime Minister Sanae Takaichi's strong push to lower the consumption tax on food carries clear electoral motives, while domestic political pressure to slow down rate hikes persists, which could cause the BOJ to continue lagging behind inflation trends. If monetary policy remains lagging for an extended period, catch-up rate hikes aimed at curbing inflation in the future could push the terminal rate higher than the currently predicted 2%.
September or October? JPMorgan Still Bets on October
After the BOJ recently signaled that it might raise rates as early as September, the market quickly increased expectations for action in September.
JPMorgan acknowledged that the risk of a September rate hike has risen significantly but still maintains an October hike as the baseline scenario.
The reason is that if the BOJ raises rates in September following the June hike, the market will quickly bet on another hike in December, meaning the central bank would need to abandon the gradual policy pace it has consistently emphasized—a scenario policymakers wish to avoid.
JPMorgan believes that U.S. economic data, the movement of the U.S. dollar, and their impact on the yen exchange rate in the coming weeks will be key variables determining whether the BOJ ultimately chooses to act in September or October.
2027 Rate Hike Forecast Revised Up to Three Times
More significant changes are occurring in the medium- to long-term policy path.
JPMorgan has adjusted its forecast for rate hikes in 2027 from the original two (April and October) to three (March, July, and December), expecting the policy rate to rise to 2% by the end of 2027.
The report notes that Japan plans to reduce the food consumption tax from 8% to 1% starting in April 2027 for a two-year period, and the funding plan to offset the tax cut has not yet been finalized. Against the triple backdrop of continued fiscal expansion, persistent global inflationary pressures, and unresolved risks of yen depreciation, the BOJ will have to accelerate the pace of policy normalization in the future to prevent inflation expectations from becoming further unanchored.
In other words, the looser the fiscal policy, the greater the pressure for monetary tightening.
For the market, this means that in the coming months, the interaction between Japanese interest rates, the yen exchange rate, and fiscal policy will remain the core variable influencing the performance of Japanese assets.
