Analysts at ING believe markets are underestimating how far the Bank of Japan (BoJ) could eventually raise interest rates, citing signs of structural change in Japan’s economic landscape—including sustained wage growth and rising asset prices.
In a note this week, ING argued that while the near-term policy rate may top out around 1.25%, the BoJ’s longer-run “neutral” rate—the level at which monetary policy is neither stimulative nor restrictive—is likely closer to 2%. That’s above the midpoint of the BoJ’s own estimated range of 1.0% to 2.5%.
“It’s a non-consensus view, but we think a neutral rate around 2% is justified,” ING said. “We believe the probability of achieving the 2% inflation target on a sustainable basis is far higher than the market currently expects.”
ING points to two years of strong wage growth—around 5%—as a key signal of economic normalisation. In addition, rising land, property and equity prices, as well as shifting corporate price-setting behaviour, suggest Japan may finally be emerging from decades of entrenched deflation.
“The market tends to be overly pessimistic on the Japanese economy, and in consequence, heavily biased toward a dovish stance on rates,” the analysts wrote. “Just because Japan has been in deflation for decades doesn’t mean it can’t return to normal.”
If ING’s view plays out, tighter Japan-U.S. rate differentials may follow—potentially making fixed-rate investments more attractive and offering opportunities in currency and bond markets sensitive to policy divergence.
