The Bank of Japan (BoJ) continues tightening, with governor Kazuo Ueda signaling further rate hikes. Our neutral rate estimates have increased from 1-2% to 1.25-2.25%, implying up to three more hikes. Structural factors like fiscal expansion and demographics drive this shift.

The new government’s multiyear fiscal plan aims to boost investment in strategic industries, potentially raising the neutral rate via higher demand. However, skepticism exists due to inflation and aging demographics. Japan’s population over 65 is 30%, set to rise, which could suppress savings-investment balance and neutral rates.

Recent BoJ staff models and IMF estimates align with upward trends, though uncertainty remains. BoJ policymakers broadly agree rates are below neutral, with Ueda noting current rates at 0.75% are insufficient. Divergent views exist among board members, but most anticipate hikes in 2026-2027.