The Bank of Japan is widely expected to keep the policy rate steady at 0.75% tomorrow. The central bank will also release the quarterly outlook report where inflation is expected to be revised higher, while growth lower due to the US-Iran war.
There were some speculations a couple of weeks ago that the BoJ could have hiked already in April, but the macro conditions were never really there. In fact, despite the third consecutive year of wage growth above 5%, inflation hasn’t shown any sign of re-acceleration. On the contrary, it’s been trending downwards since last year.
The strong decline in headline inflation in recent months has been attributed to government subsidies for electricity and gas but the Core-Core CPI, which excludes food and energy prices, has been slowing steadily as well. It’s still above the BoJ’s 2% target (currently at 2.4%), but not really screaming for urgent hikes.
BoJ Governor Ueda recently said that the US-Iran war could increase inflation but also weigh on growth. Moreover, he added that it’s an extremely difficult challenge to deal with negative supply shocks through monetary policy which impacts primarily demand. This shows that the BoJ is not eager to adjust interest rates at all.
Nonetheless, we can expect the central bank to keep its tightening bias but not pre-commit to anything at this point in time. There are some expectations that the BoJ could lay the groundwork for a rate hike in June. It’s more likely they adopt a “wait and see” approach to see how the US-Iran stalemate and the economic data evolves before the next meeting.
The market is pricing in a 50% probability of a rate hike in June and a total of 45 bps of tightening in 2026. If we get a clear signal of a June hike, we will likely see a short-term rally in the Japanese yen across the board
