ING analysts discussed the recent 25 basis point rate hike by the Bank of Japan and what it means for future increases. The report highlights the central bank’s confidence in reaching its inflation goals while maintaining a cautious approach to future guidance. Additional rate hikes are anticipated, but not before 2026. The Bank of Japan raised rates by 25 basis points and is open to future hikes. Governor Kazuo Ueda provided neutral comments about future guidance. November’s Consumer Price Index met expectations, showing continued inflation pressure, with another 25 basis point hike likely in the second half of next year.

Sustainable Inflation Expectations

The statement from the meeting shows confidence in sustainable inflation, citing expectations for steady wage increases and limited risks to businesses setting wages. Headline inflation is expected to drop below 2% by early 2026 due to energy subsidies and falling rice prices. However, core inflation is projected to slow only slightly, staying above 2%. It’s predicted that USD/JPY will decrease next year as the costs to hedge foreign exchange for Japanese holders of US debt securities decrease. The three-month forward FX hedging costs have fallen to 3.22% per year from a high of 6.00% in late 2023. The Bank of Japan has made its anticipated 25 basis point rate hike, confirming its growing confidence in sustainable inflation. However, Governor Ueda’s neutral comments suggest they are not in a hurry for further changes. This indicates a time of observation that may reduce immediate volatility in the yen.

Future Inflation Projections

We don’t expect another rate hike until the second half of 2026. The latest November core CPI data, which excludes fresh food and energy, showed a 2.3% year-over-year increase. This reinforces the belief that underlying price pressures remain strong. The Bank of Japan will likely wait for more wage growth information in the spring before deciding on its next steps. Headline inflation is expected to fall below 2% in early 2026, mainly due to government subsidies and lower food prices. A similar situation occurred in 2024, when energy subsidies caused a temporary drop in the headline figure without changing the central bank’s long-term policies. Traders should focus on the expected short-term drop in the headline number. Over the next year, we anticipate USD/JPY will trade lower. A major factor is the significant decline in the cost for Japanese institutions to hedge their US dollar assets. These FX hedging costs peaked at around 6.00% in late 2023 but have now fallen to 3.22%, making it more appealing for Japanese funds to hold US debt and support the yen. For derivative traders, this suggests positioning for a stronger yen over the medium term rather than in the immediate future. Selling near-term USD/JPY call options may be a good strategy to take advantage of the expected calm. In the longer term, buying JPY call options with mid-2026 expiration could align with the timing of the next possible rate hike. Create your live VT Markets account and start trading now.

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