BOJ Tightening Could Be Gradual — What That Means for Markets

Based on BofA’s outlook, the BOJ may start raising interest rates again possibly beginning in early 2026 provided inflation remains on a gradual upward path. BofA estimates the policy rate could reach around 1.5% by end of 2027, if underlying inflation and economic conditions support it. A gradual tightening rather than a sharp hike — might help Japan avoid shocks, giving markets and businesses time to adjust. At the same time, it could support the value of the Japanese currency. However, higher rates could also add pressure on borrowers and exporters, especially in sectors sensitive to interest costs or foreign exchange rates. Overall, a steady path to normalization seems likely, but the pace and timing will depend heavily on how inflation and domestic demand evolve.