BNP Paribas expects Japan’s GDP growth to slow to 0.5% in 2026 from 1.1% in 2025 as higher inflation and production costs weigh on activity. The Bank of Japan is projected to continue normalising policy, with a 25 bp hike in Q2 2026 and a terminal rate of 2.0% by end-2027. In FX, USD/JPY is expected to stabilise around 160 by Q4 2026 and in 2027.

Yen stabilisation with gradual BoJ hikes

"We expect annual GDP growth to stand at 0.5% in 2026, down from 1.1% in 2025."

"Inflation has generally overshot the 2% y/y target since 2022 and is expected to stay there through at least 2028."

"Accordingly, the Bank of Japan initiated a process of “adjustment in the degree of monetary accommodation” in 2024, lifting the policy rate to 0.75% so far (previously negative)."

"We expect the process to extend, including one hike (25pb) in Q2 2026, until a 2.0% terminal rate in end-2027."

"We anticipate stabilisation of the yen and the GBP against the dollar in 2026 (USD/JPY 160 and GBP/USD 1.35 by Q4 2026) and 2027."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)