The Bank of Japan may preemptively "strike" with interest rate hikes! Bank of America’s latest forecast signals a shift in monetary policy, expected to start in April, gradually tightening from 2026 to 2027. This could lead to three consecutive rate hikes.

While the Federal Reserve and the European Central Bank may have entered a rate-cutting cycle, the Bank of Japan may just be starting its rate-hiking cycle. This policy divergence will be one of the core themes in the global foreign exchange market and capital flows in 2026.

Impact on the yen: The expectation of an earlier and clear path for interest rate hikes will support the yen exchange rate in the medium to long term. The prospect of narrowing interest rate differentials may attract capital back to Japan.

Impact on global markets: As the world's largest creditor nation, rising interest rates in Japan could lead to Japanese investors reducing overseas investments (such as U.S. bonds and European bonds) and redirecting funds domestically, which could exacerbate volatility in global financial markets during certain periods.

All forecasts are based on current economic data and extrapolations. If a global or Japanese economic recession occurs, and inflation falls rapidly, the Bank of Japan may very well delay action.

Bank of Japan Governor Kazuo Ueda has repeatedly emphasized maintaining a loose financial environment. Even if rate hikes begin, the pace may be slower and more gradual than Bank of America predicts.

In summary, this forecast from Bank of America reflects the strengthening consensus in the market that a “historic shift” in Japan's monetary policy is imminent, and the expected timeline is continually moving forward. For us investors, it is essential to closely monitor Japan's wage data, inflation reports, and any comments from Bank of Japan officials in the coming months.

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