The Bank of Japan (BOJ) could transition to an aggressive inflation-fighting stance as early as December 2026, accelerating interest rate hikes to a quarterly pace, according to Tsutomu Watanabe, a former BOJ official and prominent price dynamics expert.

Watanabe's assessment suggests that rising underlying inflation and sustained wage growth may compel the central bank to step away from its current accommodative policy posture. If the BOJ moves to quarterly rate increases, it would mark a significant departure from the cautious, incremental approach that has characterized its recent monetary policy normalization. Japan's annual shunto spring wage negotiations have produced notable pay increases in 2024, reinforcing expectations that broader inflationary pressure may persist.

The BOJ has historically maintained an ultra-loose monetary policy, including its yield curve control framework, aimed at sustainably achieving its 2% inflation target. After years of battling deflation, Japan's inflation dynamics began shifting, prompting the central bank to begin gradually adjusting its stance. In March 2024, the BOJ ended eight years of negative interest rates, its first rate increase since 2007, signaling a formal exit from its unconventional easing era. Watanabe, now a professor at the University of Tokyo, previously served in the BOJ's Research and Statistics Department and is widely recognized for his expertise in Japanese price trends.

Watanabe's comments come as global markets closely monitor the BOJ's next moves, with investors weighing the implications of a faster tightening cycle for the Japanese yen, government bond yields, and broader financial conditions. Japan remains the world's fourth-largest economy, and shifts in BOJ policy carry weight beyond domestic borders, particularly given the yen's role in global carry trades and the central bank's outsized presence in Japanese government bond markets.

Source: Economic Times Markets