BNP Paribas projects that Japan's Gross Domestic Product (GDP) growth will slow to 0.5% in 2026, down from 1.1% in 2025, as the energy shock negatively impacts the country's economic momentum [1]. Despite this slowdown, inflation is expected to remain above the Bank of Japan's (BoJ) 2% target through at least 2028, continuing a trend that began in 2022 [1].
The BoJ began adjusting its monetary policy stance in 2024, raising the policy rate to 0.75% from previously negative levels [1]. BNP Paribas anticipates that this gradual normalisation will continue, with a further 25 basis point hike expected in the second quarter of 2026 and a terminal rate of 2.0% projected by the end of 2027 [1].
As a result of these policy moves, BNP Paribas expects the USD/JPY exchange rate to stabilise around 160, reflecting the BoJ's ongoing tightening and the persistence of inflation above target despite slower economic growth [1]. The report highlights that the energy shock remains a key external factor weighing on Japan's economic outlook, but the central bank's steady approach to policy normalisation is seen as supporting currency stability [1].
CONCLUSION
BNP Paribas forecasts a challenging environment for Japan, with slower GDP growth and persistent inflation above target due to energy shocks. However, the BoJ's gradual policy tightening is expected to stabilise the yen, with USD/JPY seen around 160. Market participants may interpret these developments as supportive of currency stability despite macroeconomic headwinds.