Standard Chartered analysts Nicholas Chia and Chong Hoon Park highlight that new Bank of Japan (BoJ) indicators show underlying inflation near or above the 2% target and a positive output gap since Q1 2022, suggesting growth above potential. They argue this backdrop, alongside a still-accommodative policy stance, could justify further rate hikes, although meeting market expectations for 2026 remains challenging.

Underlying inflation and output gap shift

"The Bank of Japan (BoJ) released a bevy of economic data on underlying inflation in late March."

"This includes new CPI indicators – which exclude so-called institutional factors like government subsidies – showing underlying inflation is near or above the BoJ’s 2%-target."

"The output gap is also estimated to be positive since Q1-2022, which suggests actual growth has been running ahead of potential, in contrast to previous estimates of a persistently negative output gap."

"The BoJ assessed the neutral rate range as broadly unchanged at 1.1-2.5% in nominal terms."

"We think there may be a high hurdle for the BoJ to meet market expectations for two hikes in 2026."

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