BOJ December Hike: Daiwa Sees 2% Peak, 10Y at 1996 High

The Bank of Japan will likely raise its policy rate again in December 2026 and follow with another hike in April 2027, Daiwa Securities economist Kenji Yamamoto said, after the BOJ lifted its policy rate to 1.25% in September and Governor Kazuo Ueda declared a shift in the policy phase. Japan's 10-year government bond yield is already at its highest since 1996, keeping the front end of the curve under upward pressure. Daiwa sees the risks around its own call tilted towards earlier moves, not later ones.

Context — Why the BOJ's September Hike Matters Now

The comparable Daiwa leans on is the BOJ's own communication trail. Yamamoto notes the message was well telegraphed before the September meeting: it had already appeared in the July Summary of Opinions and in a speech by Deputy Governor Ryozo Himino shortly before the decision. That gives the December call a documented precedent rather than a forecast pulled from thin air.

The macro backdrop is one of tightening financial conditions arriving through the bond market rather than the policy rate alone. Yamamoto points out that long-term and super-long yields have already tightened conditions considerably, even as bank lending and asset markets remain accommodative. The neutral rate, in his reading, is still uncertain.

What changed is the BOJ's objective. With underlying inflation close to 2%, the task is no longer to lift inflation towards target but to hold it there and prevent an overshoot. That reframing is the catalyst behind the quarterly-hike path Daiwa now expects.

Ueda gave four reasons for the September move: a worsening situation in the Middle East, stronger than expected AI-related demand, elevated inflation expectations and firm wage data. Each of those feeds directly into the December question, because none has resolved.

Data — What the Numbers Show

The anchor figures come from the September decision and Daiwa's path. The policy rate now sits at 1.25%, up from the prior level, and Daiwa's forecast has it peaking around 2%. The gap between 1.25% and 2% is what the quarterly cadence is designed to cover.

Item	Level
BOJ policy rate after September	1.25%
Daiwa's expected peak	around 2%
Next hike (Daiwa)	December 2026
Following hike (Daiwa)	April 2027
Japan 10-year yield	highest since 1996

Oil is the swing input. Ueda described a second wave of energy-driven price increases arriving before the first had fully worked through to consumer prices. If crude stays high, Yamamoto sees a growing chance the BOJ raises its core inflation forecasts for this fiscal year and next in the October Outlook Report.

On the currency side, the report pairs the BOJ with the Reserve Bank of Australia, both tightening. That is a peer comparison worth holding onto: when two central banks move in the same direction, the rate-gap trade that historically supported AUD/JPY loses its engine.

Analysis — What It Means for Yields, the Yen and AUD/JPY

The second-order effect runs through the JGB curve first. A December hike fits a steady, quarterly pace, which should limit surprises, but Daiwa's skew towards earlier moves means the front end stays bid-up in yield terms. The 10-year already at its highest since 1996 shows how much of that pressure has been priced.

The yen is the transmission channel Daiwa watches most closely. A sharp fall in the yen is one of the few things that could speed the BOJ up, because it drives import costs higher. Yen weakness, in that framework, brings hike expectations forward rather than pushing them out.

For AUD/JPY, the dynamic is unusual. Both the RBA and the BOJ are tightening, which blunts the rate-gap trade that has historically supported the pair. Carry flows that once relied on a wide and widening differential now face two central banks moving the same way.

The counter-argument sits in the tightening already delivered. Yamamoto sees consecutive hikes as unlikely precisely because long-term and super-long yields have done so much of the work. If earlier hikes begin to clearly restrict lending and asset markets, the pace would slow. He also sees no need yet to raise his 2% peak forecast, even while judging risks tilted towards earlier and slightly higher.

Positioning follows that split. Bond desks are leaning against the front end, while carry traders who owned AUD/JPY for the differential are the natural sellers if the BOJ confirms December.

Outlook — What to Watch Next

The first test of the December call is the BOJ's October Outlook Report. Any upgrade to its core inflation forecasts for this fiscal year and next would validate the path, and Yamamoto ties that possibility directly to whether oil stays high.

Ueda's own language sets the second catalyst. He said the next move would basically be a hike, and he did not rule out back-to-back increases or a 50 basis point step if the risk of inflation running well above target grows. Daiwa treats both as unlikely, so any signal in that direction would force a repricing.

On the yen, the trigger to watch is a sharp fall, which Daiwa flags as a factor that could accelerate the BOJ. There is no level attached to that condition in the forecast, so the condition itself is the marker. The BOJ also tightened its climate-related lending facility at the September meeting, switching those loans to a floating rate and capping them so the programme no longer undercuts rate hikes.

Frequently Asked Questions

What does a December BOJ rate hike mean for retail investors?

A hike from 1.25% towards Daiwa's roughly 2% peak raises borrowing costs across Japan and lifts JGB yields further, which pressures bond prices and can weigh on rate-sensitive equities. For investors holding yen exposure, a hike typically supports the currency. Daiwa frames the pace as quarterly, which is intended to limit market surprises, though the firm sees risks tilted towards earlier moves rather than later ones.

Why does yen weakness speed up the BOJ?

Daiwa identifies a sharp fall in the yen as one of the few things that could accelerate the BOJ, because it drives up import costs and feeds inflation. With the BOJ now focused on preventing an overshoot above 2% rather than pushing inflation up, currency-driven import inflation becomes a direct policy input. Ueda also cited a second wave of energy-driven price increases arriving before the first had fully passed through.

What happens to AUD/JPY if both central banks keep tightening?

The rate-gap trade that historically supported AUD/JPY weakens when the RBA and BOJ move in the same direction. Daiwa's view is that simultaneous tightening blunts that differential-driven support. The pair therefore depends more on relative pace than on a widening gap, which is why Daiwa's tilt towards earlier BOJ hikes matters for positioning even without a change to the RBA's own path.

Bottom Line

Daiwa's December call rests on a BOJ that now defends 2% rather than chasing it, with the yen the trigger that could pull the hike forward.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.