Doha: Qatar National Bank (QNB) anticipates that the Bank of Japan (BoJ) will persist in gradually normalizing its monetary policy in the upcoming quarters. This expectation is driven by entrenched inflation, elevated inflation expectations, and increasing upside risks from external shocks and exchange rate fluctuations.According to Qatar News Agency, QNB's weekly economic commentary indicates that the balance of risks favors further policy tightening, despite the BoJ's cautious approach. Currently, policy rates are at the lower end of the neutral interest rate estimates, suggesting that monetary conditions are still accommodative. Both financial markets and analysts expect the benchmark policy rate to rise toward 1.5% in the medium term.QNB highlighted that on June 16, the BoJ raised its benchmark policy rate by 25 basis points to 1%, the highest since 1995, marking a significant shift from the ultra-loose monetary policies of the past three decades. This move follows the normalization process initiated in early 2024 when the central bank ended its negative interest rate policy and began a series of rate increases.The report suggests that the tightening cycle reflects a fundamental change in Japan's inflation dynamics. After years of struggling to meet its 2% inflation target, the BoJ now observes stronger underlying price pressures due to post-pandemic supply shocks, stronger wage growth, and rising inflation expectations.QNB noted increased confidence among policymakers that inflation can be sustained around the central bank's target, reducing the necessity for extraordinary monetary accommodation.The commentary identified three key factors likely to influence Japan's monetary policy: the transition to persistent inflation, the impact of external shocks and exchange rate movements on inflation, and the potential need for further policy rate increases to reach a neutral level.Japan's shift to a more persistent inflation regime supports the case for further policy normalization. While inflation remai ned below the BoJ's target for much of the past decade, recent data indicate a more durable rise in inflation, with core inflation staying above target for an extended period and inflation expectations rising to their highest levels in decades.QNB reported that inflationary pressures are increasingly driven by permanent factors. Wage settlements surpassed 5% in both 2025 and 2026, the strongest in over three decades, supported by a tight labor market and robust corporate profitability. Higher wages have boosted domestic demand, with businesses more willing to pass higher costs to consumers.The report also pointed to external shocks and exchange rate dynamics as significant inflationary risks. Japan's dependency on imported energy and raw materials makes it vulnerable to global commodity price fluctuations and trade disruptions. The ongoing conflict in the Middle East has heightened uncertainty in energy markets, raising inflation concerns due to higher oil prices. Reflecting these risks, the BoJ revised i ts 2026 core inflation forecast upward to 2.5% to 3.0%.Additionally, the weak Japanese yen has increased the cost of imported goods, especially energy and food. Policymakers are expected to focus more on the inflationary effects of persistent currency weakness and imported price pressures.Despite the recent tightening cycle, QNB argued that Japan's monetary policy may still be accommodative. The BoJ estimates the neutral interest rate between 1.1% and 2.5%, suggesting that the current rate of 1% is below what is needed for full normalization. Real interest rates remain negative as inflation exceeds nominal rates, indicating ongoing support for economic activity. Consequently, QNB expects the BoJ to maintain a tightening bias, albeit gradually.