Japanese markets may face turbulence next year if the Bank of Japan falls “behind the curve” in controlling inflation, according to Yuichi Chiguchi, chief investment strategist at BlackRock Japan.
The BOJ is widely expected to raise its key policy rate by 25 basis points to 0.75% next week. Even with this increase, interest rates will remain far below Japan’s inflation rate, which is hovering around 3%. Chiguchi warned that if price growth accelerates in the second half of 2026, the central bank may be forced into a faster and more aggressive tightening cycle.
“They will have to chase it,” Chiguchi said, adding that markets dislike a behind-the-curve scenario more than almost anything else.
Despite these risks, BlackRock remains optimistic about Japanese equities in the coming year. Stocks surged in 2025, lifting the Nikkei index to an all-time record, and Chiguchi expects momentum to continue.
He noted that global enthusiasm for artificial intelligence has supported shares across sectors. Japanese suppliers to the AI industry are positioned to benefit from what he described as “massive investment” in the field.
Japan’s financial sector is also expected to contribute to market strength, even though banks may face accounting losses on their holdings of Japanese government bonds (JGBs).
JGB prices have fallen sharply, sending 10-year yields to an 18-year high of 1.97% last week. The move was driven partly by fiscal concerns linked to Prime Minister Sanae Takaichi’s stimulus program. Chiguchi said yields could rise to 2% or even 3%, but he does not see this as a major threat.
“The impact on the real economy would not be overly negative, while the reflationary environment remains supportive for corporate activity,” he said.
