BoJ minutes from the March meeting show several board members judged it suitable to keep the policy rate at 0.75%. Some members also said keeping rates steady was appropriate given uncertainty in the Middle East.
Members discussed inflation risks from higher oil prices and the chance of a rebound in inflation. Several said temporary supply shocks should be looked through, but persistent shocks with second-round effects would require a response focused on core inflation.
Policy Rate Outlook
Some members said the BoJ should keep raising rates as the economy and prices improve, and one said the deeply negative real interest rate should be modified soon. Others said delays could lead to swift, substantial tightening, and that rate rises may need to speed up if the Middle East conflict extends.
One member said there was no evidence past rate rises had reduced the stimulus effect on the economy. Another said the BoJ should review from the next meeting whether financial conditions stayed accommodative after the previous increase.
A Ministry of Finance representative warned that a surge in energy costs could harm the economy and called for close market monitoring. After the minutes, USD/JPY was up 0.04% at 156.45.
The BoJ targets inflation of around 2% and began ultra-loose policy in 2013 using QQE, then added negative rates and yield curve control in 2016. It lifted rates in March 2024, moving away from the ultra-loose stance.
Market Implications
The Bank of Japan is clearly signaling a faster pace for interest rate hikes, moving away from the cautious stance we saw in 2025. With the latest Tokyo Core CPI for April 2026 coming in at 2.9%, inflation is proving much stickier than anticipated. This makes the internal concerns about falling behind the curve very relevant for us today.
We should therefore consider positioning for a stronger yen in the coming weeks. The current USD/JPY rate around 156.45 seems vulnerable given this hawkish language, especially as other central banks may be nearing the end of their own hiking cycles. Options strategies that benefit from a move down toward the 150-152 range could now be appropriate.
This outlook also implies higher yields on Japanese government bonds. After the slow pace of tightening throughout 2025, the market has not fully priced in the urgency expressed by several board members. Short positions in JGB futures should be considered as the market begins to anticipate a more aggressive tightening path.
The risk of stagflation, as mentioned by one member, is now a credible threat with Brent crude trading stubbornly above $95 a barrel throughout April 2026. This uncertainty, combined with divided opinions on the board, suggests higher market volatility is likely. Buying volatility on the yen could hedge against a sudden, sharp policy adjustment from the bank.
On top of external pressures, the final spring “shunto” wage negotiations recently settled at an average of 4.1%, providing strong domestic fuel for inflation. This gives the Bank of Japan the justification it needs to act “without hesitation,” as several members argued. The risk of the bank unintentionally lagging on inflation threats seems to be diminishing rapidly.
