Rabobank’s Jane Foley said Nikkei reports point to the Bank of Japan raising rates by 25 bps at its next meeting, in line with market expectations, while also weighing a pause in tapering its JGB purchase programme from April 2027. The BoJ has indicated its JGB holdings would be down about 16–17% by then because of tapering, and the newspaper said policymakers may consider stopping reductions at that level. The backdrop includes concerns in the JGB market about the BoJ being behind the curve on inflation, as well as the risk that fiscal stimulus could lift bond supply.
A steadier JGB market could reduce bouts of JPY volatility, particularly if a tapering pause gives the market more time to reach equilibrium, provided supply does not rise sharply. Foley said that if tapering is paused, support for the JPY may rely more on guidance for a faster pace of rate hikes at the June meeting, though growth headwinds linked to the Iran war could constrain that path. Rabobank’s three-month projection sees USD/JPY at 158, based on further BoJ rate increases this year.
Markets Anticipate BoJ Rate Hike and Policy Guidance
The market is bracing for the Bank of Japan’s upcoming policy meeting, with recent reports strongly suggesting a 25 basis point rate hike is coming. Overnight index swaps are currently pricing in an 85% probability of such a move, meaning the hike itself is largely expected. The real focus for us will be on the bank’s forward guidance and any new policy signals.
A new consideration is the idea that the BoJ may pause the reduction of its government bond holdings starting in April 2027. This move would be designed to add stability to the JGB market, which should lessen the chance of sharp, unpredictable moves in the Yen. We’ve already seen one-month implied volatility on USD/JPY dip below 8.0% this morning on this news.
Implications for JPY Volatility and Monetary Policy Path
By signaling a pause in bond tapering, the BoJ may need to rely more heavily on interest rate hikes to support the Yen. However, the ongoing conflict in Iran, which has kept Brent crude above $110 per barrel for the past month, presents a significant headwind to economic growth. This makes it difficult for the central bank to commit to an aggressive hiking cycle.
We have seen this playbook before, recalling the market choppiness during the slow unwind of Yield Curve Control back in 2023 and 2024. The BoJ is likely trying to avoid a repeat of that volatility by telegraphing its intentions well in advance. This suggests a preference for gradual, well-communicated policy shifts.
For the coming weeks, this creates a complex picture where the path of least resistance for USD/JPY remains upward, but with less expected volatility. This points toward strategies that benefit from a steady grind higher, rather than a sharp breakout. Our three-month forecast of USD/JPY 158 remains, but we now believe the journey there will be a more orderly one.
