JPMorgan: Significant Upside Risk for Bank of Japan Rate Hike in September

Fiscal expansion is reshaping Japan's monetary policy path.

JPMorgan released a report on August 7 stating that the Japanese government's push for tax cuts and expanded fiscal support will further increase the pressure on the Bank of Japan to tighten monetary policy. Against the backdrop of fiscal stimulus potentially boosting economic demand and intensifying inflation risks, the bank believes that the Bank of Japan may accelerate its rate hike pace in the future.

Although the probability of a rate hike in September has risen significantly recently, JPMorgan still maintains its baseline judgment of a rate hike in October and raises its forecast for rate hikes in 2027 from two to three, expecting the Bank of Japan's policy rate to rise to 2% by the end of 2027.

Meanwhile, JPMorgan warns that the policy led by Japanese Prime Minister Sanae Takaichi to lower the food consumption tax has clear electoral motivations, and persistent political pressure in Japan to slow down rate hikes may cause the Bank of Japan to continue lagging behind inflation trends. If monetary policy remains delayed for a long time, catch-up rate hikes in the future to curb inflation could push terminal rates above the current forecast of 2%.

September or October? JPMorgan still bets on October

After the Bank of Japan recently signaled that a rate hike could come as early as September, markets quickly raised their expectations for action in September.

JPMorgan acknowledges that the risk of a rate hike in September has risen significantly, but still maintains October as its baseline scenario.

The reason is that if the Bank of Japan follows up its June rate hike with another in September, the market will quickly bet on another hike in December. This would mean the central bank would need to abandon its repeatedly emphasized gradual policy pace—something policymakers are eager to avoid.

JPMorgan believes that, in the coming weeks, U.S. economic data, moves in the U.S. dollar, and their impact on the yen exchange rate will be key variables in determining whether the Bank of Japan ultimately acts in September or October.

2027 rate hike forecast revised up to three times

The bigger change lies in the medium- and long-term policy paths.

JPMorgan has revised its 2027 rate hike forecast from two times (April, October) to three times (March, July, December), expecting the policy rate to rise to 2% by the end of 2027.

The report notes that Japan plans to lower the food consumption tax from 8% to 1% starting April 2027 for two years, and the supporting tax source plan has not yet been finalized. In the triple context of continued fiscal expansion, persistent global inflationary pressures, and unresolved yen depreciation risk, the Bank of Japan will have to accelerate policy normalization to prevent inflation expectations from further de-anchoring.

In other words, the looser the fiscal policy, the greater the pressure to tighten monetary policy.

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 variables affecting Japanese asset performance.