Capital Economics: The Bank of Japan may raise interest rates to 1.75% by 2027.

The Bank of Japan's view on the country's economy seems to be more optimistic, prompting Capital Economics to believe that the central bank may raise interest rates earlier than expected. The Bank of Japan kept rates unchanged at its first meeting in 2026 and raised its GDP growth forecasts for the current and next fiscal years. Marcel Thieliant of Capital Economics stated that despite the announcement of energy subsidies in November, the Bank of Japan did not lower its inflation expectations. He no longer expects core inflation to remain subdued, but to continue to rise moderately. He believes that further policy tightening is almost certain given the backdrop of deeply negative real policy rates. Capital Economics believes that, although the potential distortions from the possible sales tax exemption policy may arise, price pressures will remain strong. Currently, the risks for their forecast of a rate hike in July lean towards an earlier timing. Regardless, Capital Economics expects the policy rate to reach 1.75% by the end of 2027.