OECD Forecasts Bank of Japan to Hike Interest Rates to 2% by End of 2027

The Organization for Economic Co-operation and Development (OECD) stated in its latest economic survey report released on Wednesday that the **Bank of Japan's policy interest rate is expected to rise to 2% by the end of 2027.** This forecast is significantly higher than the 1.5% terminal rate expectation currently held by the International Monetary Fund and most market analysts.

The OECD believes that **under the assumption that the inflation rate remains at the 2% level, Japan's current policy interest rate is still at the lower limit of the neutral level.** To prevent the economy from overheating, the institution advises the Bank of Japan to continue with a gradual interest rate hiking path.

This estimation appears relatively hawkish among the current mainstream financial institutions. Previously, the Bank of Japan calculated the country's nominal neutral interest rate range to be between 1.1% and 2.5%, but emphasized that there is still great uncertainty about the specific level.

For investors, the correction of the interest rate path means the complete end of Japan's long-term easy environment. If the Japanese Central Bank ultimately adopts this more aggressive interest rate recommendation, it will have a profound impact on global capital flows, the yen exchange rate, and the Japanese government bond yield curve.

In terms of fiscal policy, the OECD emphasizes that Japan急需to build a buffer space against the backdrop of population aging and rising debt repayment costs. Due to the anticipated continuous increase in public spending such as defense expenditure, Japan's current fiscal pressure is increasingly apparent.

The report clearly advises the Japanese government to gradually increase the existing consumption tax rate. The OECD points out that Japan's current consumption tax level of 10% is low among member countries, and increasing the tax rate can create substantial revenue without seriously damaging long-term growth. Previously, Prime Minister Takumi Takaki mentioned that he is considering adopting temporary tax cuts to alleviate the cost of living pressure on the public, but the OECD believes that such universal tax cuts are not only costly but also lack targeted effectiveness.