The OECD projected on Wednesday that the Bank of Japan will continue steadily normalizing monetary policy, with the short-term policy rate expected to rise from the current 0.75% to 2% by the end of 2027.
In its latest Economic Survey of Japan, the OECD argued that resilient domestic demand, sustained wage growth, and improving inflation dynamics should allow the Japanese economy to absorb external shocks from the Middle East conflict. “Growth is projected to remain above potential in 2026-27.”
The report highlighted what it described as “significant developments towards a positive wage-price cycle,” pointing to rising corporate profits, stronger pricing power among firms, and improving inflation expectations. According to the OECD, labor shortages and changing price dynamics are supporting robust nominal wage growth and private investment, helping Japan’s economy remain resilient despite geopolitical volatility and higher energy costs.
The OECD said “policy interest rate should continue to be increased gradually to avoid overshooting” the 2% target, particularly as the output gap closes and wage growth shows signs of becoming more sustainable. The report argued that the current policy rate remains “near the bottom end of the range of the nominal neutral rate.”
The OECD expects inflation to “converge towards the 2% target” during 2026-27, reinforcing the case for continued policy normalization and further reduction of the BOJ’s balance sheet over time.
