DBS: Widening US-Japan Interest Rate Spread May Require BOJ to Shift to Quarterly Rate Hikes to Narrow the Gap

(1) Eugene Leow, Senior Interest Rate Strategist at the DBS Group Research Department, stated that after media reports indicated the Bank of Japan is open to accelerating rate hikes, investors may focus on changes in short-term interest rate differentials between the US and Japan. (2) He pointed out that since early 2026, the yield spread between the 1-year forward 1-year US dollar interest rate and the corresponding yen interest rate has widened significantly, as market expectations have shifted from a US Federal Reserve rate cut to a rate hike, while the pace of rate hikes by Japan has been much more moderate. (3) Leow added that if the market’s expectation for a more hawkish Fed persists, investors may need to see the Bank of Japan willing to switch to a pace of raising rates by 25 basis points per quarter to gradually narrow the widening interest rate gap with the US dollar.