Commerzbank’s Volkmar Baur forecasts two further Bank of Japan rate rises in 2026. He says this would move policy closer to a rising neutral rate and support a modest yen rise against the US dollar and the euro in the second half of the year.
He notes the current policy rate is 0.75%. He adds this is still below the lowest estimate of the neutral interest rate.
Japan Policy Still Below Neutral
He states that financial conditions remain stimulative and that the key rate has not yet reached a neutral level. On this basis, he expects two more rate increases.
He also projects USD/JPY and EUR/JPY to drift lower from current levels into late 2026 and 2027. He links this to expectations being priced out in the US and Europe, which he says would support yen appreciation in the second half of the year.
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Given the current policy rate of 0.75%, financial conditions in Japan remain supportive of growth. With Japan’s core inflation for March 2026 holding firm at 2.4%, the pressure for the Bank of Japan to continue its tightening cycle is building. This supports our view that the Bank of Japan will raise interest rates two more times this year.
Trading Implications For Yen
The key interest rate has not yet reached a neutral level, meaning policy is still stimulating the economy more than intended. All signs point to financial conditions remaining loose, which would justify further moves by the central bank. We therefore expect the BoJ to act again before the end of the year to manage price pressures.
This contrasts sharply with the situation in the United States, where the Federal Reserve has already brought rates down to 4.0% and derivatives markets are pricing in at least two more cuts by year-end. The European Central Bank is in a similar position, having signaled an easing bias as growth slows. The widening policy divergence between Japan and the West is the central theme for the coming months.
For derivative traders, this outlook suggests positioning for a stronger yen in the second half of the year. Traders could consider buying Japanese Yen call options or purchasing put options on the USD/JPY pair to capitalize on the expected downturn. These positions would profit as rate hike expectations in the US and Europe are priced out.
The gradual shift away from ultra-loose policy, which we saw gain momentum throughout 2025, is now set to accelerate. Historically, when such significant interest rate differentials begin to narrow, the unwinding of carry trades can cause sharp currency appreciations. The current environment is showing similar characteristics to past cycles of yen strengthening.
With USD/JPY currently trading near 148.50, options strategies that target a move towards the low 140s by late 2026 appear attractive. Traders should look at structures with expiries in the fourth quarter to align with the timeline for both BoJ hikes and potential foreign central bank cuts. This allows time for the expected policy divergence to fully impact currency markets.
