Goldman Sachs expects the Bank of Japan to hold steady in July, with the next rate hike most likely in January 2027
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Goldman Sachs expects the Bank of Japan to hold steady in July, with the next rate hike most likely in January 2027
The report believes that Japan's economy is recovering moderately, while corporate confidence and capital expenditure appetite remain relatively resilient, but lower oil prices than at the time of the April Outlook will prompt the Bank of Japan to slightly raise its growth forecasts, lower its inflation forecasts, and maintain a gradual rate-hike path of approximately once every six months.
- The Bank of Japan's July Outlook Report is expected to maintain the basic scenario of moderate economic growth and inflation initially boosted by oil prices before declining.
- Because spot crude oil prices have fallen significantly from the level at the time of the April Outlook Report, Goldman Sachs expects the Bank of Japan to slightly raise its fiscal 2026 and fiscal 2027 growth forecasts and lower its price forecasts.
- Business conditions and investment appetite remain relatively positive, spring wage negotiations have produced base-wage growth in the mid-3% range, and high corporate profits provide a buffer for the economy against elevated oil prices.
- Goldman Sachs maintains its view of approximately one rate hike every six months, expecting the next hike to occur more likely in January 2027 after the June hike, followed by another in July 2027.
- The timing of rate hikes remains highly uncertain; market volatility, progress in government communications, and the risk of underlying inflation breaking above 2% could bring the next hike forward to October 2026.
Report interpretation
Overview
This report presents the Goldman Sachs Japan economics team's preview of the Bank of Japan's July monetary policy meeting and Outlook Report. The central view is that the Bank of Japan will leave policy unchanged at the July meeting while retaining guidance for continued gradual rate hikes. The report believes that Japan's economy is broadly tracking the Bank of Japan's previous outlook, with business conditions, capital expenditure plans, and regional economic assessments all indicating that the economy remains on a path of moderate recovery.
Core views
Goldman Sachs expects the Bank of Japan to hold steady in July because it only raised rates in June and is still assessing the impact on the economy, prices, and financial conditions. Regarding the Outlook Report, Goldman Sachs believes the Bank of Japan will maintain its baseline view of moderate economic growth and CPI rising temporarily under the influence of oil prices before declining, but will slightly raise its growth forecasts and lower its inflation forecasts because oil prices are lower than at the time of the April Outlook Report. Regarding the policy path, Goldman Sachs maintains its base-case view of approximately one rate hike every six months, expecting the next hike in January 2027 and a subsequent hike potentially in July 2027.
Analysis framework
The report primarily assesses the July Outlook Report and the subsequent interest-rate path by combining the Bank of Japan's Tankan survey, regional branch managers' meeting assessments, underlying CPI inflation indicators, the domestic corporate goods price index, import prices, oil prices, the USD/JPY exchange rate, spring wage negotiation results, and the Bank of Japan's policy communications.
Methodology notes
Assessing the policy interest-rate path through economic activity, prices, financial conditions, and risk assessments.
The report believes the Bank of Japan is more likely to raise rates at meetings when it publishes an Outlook Report because these meetings incorporate more extensive economic and price analysis, providing a firmer basis for decision-making.
Rising domestic corporate prices and import prices may pass through to consumer prices from the summer onward.
Although some underlying inflation indicators are currently slowing, corporate goods prices continue to rise, and the report expects this to increase upward pressure on B-to-C transactions and consumer prices.
Economic risks are judged to be broadly balanced, while price risks are tilted to the upside.
Wage growth and corporate profitability provide a buffer for the economy, but underlying inflation is close to 2%, and a further modest depreciation of the yen could amplify the risk of inflation exceeding the target.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Japanese Policy RateDirectly related
- Strengths
- Moderate economic recovery, wage growth, and corporate profitability support gradual rate hikes.
- Weaknesses
- The Bank of Japan needs to observe the effects of the recent rate hike, reducing the need for another hike in July.
- Comparison
- The base case is for a rate hike in January 2027, but the distribution of risks is tilted toward an earlier hike in October 2026.
- Risks
- Market volatility, the government's stance, and the risk of underlying inflation exceeding 2% could alter the timing of rate hikes.
- Yen Exchange RateIndirectly related
- Strengths
- If markets price in a Bank of Japan rate hike earlier, the yen could receive support.
- Weaknesses
- The report notes that USD/JPY remains above ¥160, and a weaker yen would increase imported inflationary pressure.
- Comparison
- The exchange rate has been broadly unchanged since the April Outlook Report, while oil prices have declined significantly.
- Risks
- A further modest depreciation could significantly increase the risk of underlying inflation exceeding 2%.
- Japanese Inflation-Linked AssetsDirectly related
- Strengths
- Rising corporate goods prices and import prices may continue to pass through to consumers.
- Weaknesses
- Oil prices are below the level at the time of the April Outlook Report, which could weigh on the Bank of Japan's price forecast.
- Comparison
- Some underlying CPI inflation indicators are currently slowing, but upstream cost pass-through could strengthen in the future.
- Risks
- Price risks are judged to be tilted to the upside, particularly the risk of underlying CPI breaking above the 2% target.
- Crude OilMacroeconomic input variable
- Strengths
- Oil-price movements are an important assumption for the Bank of Japan's growth and inflation forecasts.
- Weaknesses
- Lower oil prices will ease inflationary pressure and reduce the risk of an economic slowdown.
- Comparison
- Spot crude oil prices are significantly lower than at the time of the April Outlook Report.
- Risks
- A renewed rise in oil prices could alter the inflation path and the Bank of Japan's risk assessment.
Key data
- July Meeting Policy ViewMaintain the status quoGoldman Sachs expects the Bank of Japan not to change policy at its July monetary policy meeting.
- Base-Case Timing of Next Rate HikeJanuary 2027The report believes the next hike after the June increase is more likely to occur at the January 2027 meeting, when an Outlook Report will be published.
- Subsequent Rate-Hike PaceApproximately once every six monthsGoldman Sachs maintains its view of gradual but steady rate hikes at intervals of approximately six months.
- Risk of an Earlier Rate HikeOctober 2026If market conditions, government communications, or upside risks to underlying inflation change, the next rate hike could occur earlier than in the base case.
- Wage BackgroundSpring base-wage growth in the mid-3% rangeThe report regards this as one of the buffers enabling the economy to cope with high oil prices.
- Underlying Inflation Target AssessmentNear or reaching 2% between the second half of fiscal 2026 and fiscal 2027Goldman Sachs expects the Bank of Japan to maintain this timing assessment.
- Exchange-Rate BackgroundUSD/JPY slightly above ¥160 and broadly unchangedThe report states that USD/JPY has generally remained above ¥160 since the April Outlook Report.
- Oil-Price BackgroundSpot crude oil prices below the level at the time of the April Outlook ReportThe decline in oil prices is expected to ease downward pressure on the economy and reduce the price forecast.
Impact & implications
For markets, the base-case probability of a near-term policy surprise is low. The focus in July will be on revisions to the growth and inflation forecasts in the Outlook Report and the Bank of Japan's characterization of upside price risks. Over the medium term, if underlying inflation continues to approach 2%, the yen weakens again, or government communications proceed smoothly, markets may reprice the probability of an earlier rate hike.
Risks
- The timing of Bank of Japan rate hikes is highly uncertain and could be significantly influenced by market developments and progress in government communications.
- When underlying inflation is near 2%, further yen depreciation could amplify the risk of inflation exceeding the target.
- External uncertainties, including the situation in the Middle East, could still affect corporate confidence, oil prices, and Japan's inflation path.
- If oil prices rise again, the Bank of Japan's assessment of price risks could become more hawkish.
- If economic or financial conditions respond less strongly than expected to the June rate hike, the pace of subsequent hikes could slow.
What to watch
- Revisions to the fiscal 2026 and fiscal 2027 GDP and CPI forecasts in the Bank of Japan's July Outlook Report.
- Whether the Bank of Japan reiterates its guidance to continue raising policy rates and adjusting the degree of monetary accommodation.
- Whether underlying inflation continues to approach 2% and the Bank of Japan's wording regarding the risk of inflation exceeding 2%.
- Whether USD/JPY remains above ¥160 or depreciates further.
- Whether crude oil prices rise again from levels below those at the time of the April Outlook Report.
- Progress in communications between the Bank of Japan and the government regarding rate hikes.