BoJ Governor Kazuo Ueda said the bank will monitor signs of upward price pressure and take appropriate monetary policy to meet its inflation target. He spoke after a G7 meeting of finance chiefs and central bankers in Paris on Tuesday.
G7 central banks agreed that rising energy prices are affecting inflation expectations, the economy and financial markets. Ueda said the latest GDP data are mostly in line with the BoJ forecast, and that the Middle East situation has begun to have an impact.
Monitoring Price Pressures
Ueda said the BoJ needs to watch upward price pressure closely and is aware that long-term interest rates are rising rapidly. He said the BoJ will assess market conditions and market functionality when considering tapering plans.
He also said the BoJ will work closely with the government on the Japanese government bond (JGB) market situation.
Looking back at the G7 discussions in 2025, the concerns about rising energy prices and their effect on inflation have fully materialized. As of today, with Japan’s core inflation stubbornly high at 2.8% and WTI crude oil trading at $85 a barrel, those past warnings are our current reality. The Bank of Japan’s commitment to achieving its inflation target signals that further policy tightening is more likely than not.
This environment suggests positioning for higher interest rates, as the upward pressure on prices continues. The rapid rise in long-term rates that was a concern in 2025 has since pushed the 10-year JGB yield to 1.5%, a level not seen in over a decade. Traders should consider using options on JGB futures or interest rate swaps to hedge against, or profit from, the Bank of Japan eventually being forced into another rate hike.
Yen Volatility And Policy Divergence
The yen’s volatility remains a central theme, with the currency hovering around 150 to the dollar. Last year’s talk of taking “appropriate monetary policy” is being tested by recent GDP data showing the economy contracted by 0.4% last quarter, creating a difficult choice between fighting inflation and supporting growth. This conflict points toward continued swings in USD/JPY, making strategies like long volatility plays using options potentially profitable.
We see that the BoJ’s slow pace of tapering and policy normalization, which was only a plan in 2025, has kept its policy divergent from other major central banks. Even after exiting negative rates, the policy gap remains significant, fueling the carry trade and putting a floor under USD/JPY. Any derivatives positions betting on significant yen strength must account for this powerful underlying trend.
The geopolitical risks in the Middle East, noted as an emerging impact last year, remain a key factor supporting global energy prices. This ongoing external pressure means the BoJ has very little room to become dovish. The primary risk in the coming weeks is a hawkish surprise, not a dovish one, so short-yen and short-JGB positions are the path of least resistance.
