BNP Paribas strategists forecast that Japan's Gross Domestic Product (GDP) growth will slow to 0.8% in 2026 from 1.1% in 2025, citing higher inflation and energy-related costs as key factors weighing on economic activity. These negative effects are expected to be partially offset by fiscal support and investments in artificial intelligence (AI) [1].
The Bank of Japan (BoJ) has begun a cautious tightening cycle, raising its policy rate to 1.0% in 2024—the highest level since 1995, after previously maintaining negative rates. BNP Paribas anticipates that the BoJ will continue to hike rates by 25 basis points every four to five months, targeting a terminal rate of 2.50% by 2028 [1].
Despite this tightening, BNP Paribas projects further depreciation of the Japanese yen against the US dollar, with USD/JPY expected to reach 165 by the fourth quarter of 2026. The strategists also note that Japan is experiencing pressure on long-term rates, as evidenced by historically high 10- and 30-year yields, likely driven by the country's high public debt and the ongoing pace of monetary adjustment [1].
In addition to the yen, BNP Paribas expects the British pound to depreciate against the dollar, projecting GBP/USD at 1.32 by Q4 2026 and into 2027 [1].
CONCLUSION
BNP Paribas expects the Japanese yen to weaken further against the US dollar, even as the Bank of Japan continues its gradual rate hikes. Slowing GDP growth, persistent inflation, and rising long-term yields are seen as key challenges for Japan's economy and currency outlook.