BNP Paribas strategists see Japan’s Gross Domestic Product (GDP) growth slowing to 0.8% in 2026 from 1.1% in 2025 as higher inflation and energy-related costs weigh on activity, partly offset by fiscal support and AI (Artificial intelligence) investment. The Bank of Japan (BoJ) is expected to keep hiking by 25 bp every four to five months toward a 2.50% terminal rate by 2028, while USD/JPY is projected at 165 by Q4 2026.

Gradual BoJ hikes with Yen depreciation

"We expect annual GDP growth to stand at 0.8% in 2026, down from 1.1% in 2025."

"Accordingly, the Bank of Japan initiated a cautious process of “adjustment in the degree of monetary accommodation” in 2024, lifting the policy rate to 1.0% so far (previously negative) – the highest since 1995."

"We expect a 25pb hike about every four to five months until a 2.50% terminal rate in 2028."

"Japan is facing long-term rates pressure, illustrated by historically high 10- and 30-year yields, probably fueled by the level of public debt and the pace of monetary adjustment."

"We anticipate a depreciation of the yen and the GBP against the dollar in 2026 (USD/JPY 165 and GBP/USD 1.32 by Q4 2026) and 2027."

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