Nomura sees BoJ rates rising to 1.5% by 2027, with hawkish risks beyond

Nomura sees Japan’s rate cycle extending into 2027, with risks tilted toward a higher terminal rate.

Summary:

• Nomura sees a high probability of further BoJ tightening through 2027

• Base case assigns 60% odds to three rate hikes by mid-2027

• Policy rate would rise to 1.50%, the highest level since 1995

• A hawkish scenario sees four hikes, lifting rates to 1.75%

• Inflation persistence and wage dynamics are key swing factors

Nomura expects the Bank of Japan to continue its gradual policy normalisation over the coming years, assigning a 60% probability to a scenario in which the central bank delivers three additional rate hikes by mid-2027. Under this base case, the BoJ’s policy rate would rise from the current 0.75% to 1.50%, marking the highest level since 1995 and a decisive break from Japan’s long era of ultra-loose monetary policy.

In Nomura’s central scenario, the tightening cycle unfolds at a measured pace, with rate increases pencilled in for June 2026, December 2026 and June 2027. This path reflects the view that underlying inflation pressures will remain sufficiently firm to justify further normalisation, while the BoJ remains cautious about tightening too quickly given Japan’s sensitivity to higher borrowing costs and global growth risks.

The forecast assumes that wage growth continues to improve gradually, supported by tight labour market conditions and structural labour shortages, while inflation remains anchored above levels consistent with policy neutrality. However, Nomura does not expect a rapid or front-loaded hiking cycle, arguing that the BoJ will prioritise financial stability and avoid destabilising bond markets or triggering excessive yen volatility.

Alongside its base case, Nomura outlines a more hawkish alternative scenario, assigning it a 40% probability. In this outcome, the BoJ delivers four rate hikes by the end of 2027, lifting the policy rate to 1.75%, a level last seen in 1993. This scenario would likely require stronger and more persistent inflation dynamics, firmer wage gains, and a clearer signal that Japan’s economy can withstand higher interest rates without stalling growth.

Nomura’s analysis highlights the growing asymmetry in BoJ risks. While downside risks still exist, particularly from global demand and financial conditions, the balance has shifted toward the possibility of higher terminal rates if domestic inflation proves more resilient than expected. As such, markets may need to increasingly price the risk that Japan’s policy rate ultimately settles higher than previously assumed.