Upside risks to our interest rate forecasts are growing

The data released this week vindicate the Bank of Japan’s concerns about upside risks to inflation and we expect the Bank to keep hiking rates once every quarter. With few signs that higher interest rates are resulting in tighter financial conditions, the risks are increasingly tilting towards the Bank lifting rates above our forecast of a terminal rate of 2%. However, we think that the case for further tightening will start to weaken in the second half of next year at a time when the composition of the Board will have become more dovish.