Before the Middle East conflict, this April meeting was meant to be one where the BOJ delivers on another rate hike after the outcome of the spring wage negotiations. Instead, the war has complicated things and raised uncertainty to the point where policymakers don’t feel comfortable in rushing a decision – for now at least.
As oil prices stay higher, that is going to keep the pressure on the Japanese economy and also the yen as well. Given that backdrop, Nomura views that the BOJ may have to continue to keep a more hawkish leaning in order to prevent the currency from falling even further. That especially with USD/JPY continuing to flirt closer to the 160 level this week.
The firm notes that:
“Markets are range-bound as they await direct US-Iran talks, with USD/JPY stuck around 159. Oil prices are still elevated, keeping JPY weakness pressures high. Whether a clear direction toward normalising navigation through the Strait of Hormuz will emerge from the direct talks will be crucial for the near-term JPY direction.
Expectations for a BOJ rate hike in April have fallen sharply, with media reports suggesting a wait-and-see stance for now. The BOJ’s decision may hinge on whether it can deliver a “hawkish hold” that prevents further JPY selling. If USD/JPY moves above 160 before the April meeting, the BOJ may need to sound more hawkish toward June and beyond, while intervention by Japanese authorities will remain an option as well.”
Tokyo officials have already been making their concerns heard this week, with finance minister Katayama going on the wires multiple times to warn about intervention risks.
If the BOJ is to play ball, then they very well have to support that narrative by delivering a more hawkish hold next week.
As things stand, traders are pricing in ~92% of no policy changes by the BOJ in April
