We expect calendar 2026 GDP growth to slow 40bp to 0.8%, before accelerating to 1.0% in 2027 as global energy prices retreat on a likely US-Iran deal and household spending, while business investment picks up pace. We see headline CPI averaging 1.9% in 2026 and 2.0% in 2027, and project CPI ex. fresh food at 1.8% and 2.2%, respectively. We also forecast a quarterly pace of 25bp BoJ rate hikes from here to 2.5% at end-2027.
Until the end of calendar 2026, we anticipate a bear steepening of the JGB curve, followed by bear flattening in 2027. We project that the 2Y yield, currently at 1.98%, will rise by 12bp to 2.10% at end-2026, and by another 25bp to 2.35% at end-2027. We see the 10Y yield, now at 3.11%, rising 19bp to 3.30% at the end of this year, and then by 15bp to 3.45% at the end of next year, and the 30Y, currently at 4.19%, gaining 16bp to 4.35%, and 5bp to 4.40%, respectively.
USDJPY is likely to remain volatile, but we may not see the 41-year high of just under 164, reached in late July, for a long while. We expect the pair to end 2026 moderately firmer vs. its current level, at approximately 160, most likely modestly below this key psychological resistance threshold. In the longer run, the yen’s fundamental undervaluation will add to upside risks for the Japanese currency, and we expect USDJPY to decline in 2027 to 153.