JPY Market overview

The Bank of Japan delivered a more hawkish hold than markets expected, keeping rates at 0.75% but revealing a striking 3-6 split on the board. Inflation risks are clearly moving up the agenda, helped by firmer wage dynamics, deeply negative real rates and a sharp upgrade to the Bank’s price forecasts.

The message, however, was not forceful enough to shift the yen’s broader direction. Governor Ueda avoided giving markets a firm timetable for the next hike, instead keeping optionality open while pointing to geopolitical uncertainty and energy-price risks. That leaves the yen exposed: Japan remains highly sensitive to higher import costs, while real yields are still unattractive.

The BoJ now looks increasingly likely to tighten again, but policy is still moving slowly relative to the inflation backdrop. A June hike remains our base case, followed by another move in the fourth quarter, taking total tightening to 50 bp by year-end.

USDJPY

The yen initially found some support after the BoJ vote, but the move looks fragile. Dissent from Takata, Tamura and, more surprisingly, Nakagawa suggests the debate has shifted from whether rates should rise to when the next hike should arrive. Nakagawa’s dissent is particularly notable given her previously dovish reputation and the fact her term ends shortly after the June meeting.

The inflation outlook was the most hawkish part of the package. The BoJ lifted its FY26 CPI forecast to 2.8% from 1.9%, and FY27 to 2.3% from 2.0%, while FY28 was set at 2.0%. Growth forecasts were trimmed, but not enough to suggest a material slowdown, with GDP still expected to run close to potential after the near-term energy hit.

For USDJPY, this is not yet a convincing reversal signal. A 25 bp move in June or July would only take the policy rate to 1.00%, still well below expected core inflation. That leaves real rates negative and the yen vulnerable to any further deterioration in Japan’s terms of trade.

Intervention risk will rise if USDJPY pushes higher, but the set-up is less favourable than in 2024. Speculative yen shorts are smaller, which may reduce the impact of any official action. Unless energy prices retreat quickly or the BoJ turns more assertive, USDJPY could retest the 2024 high near 162, with an outside risk that authorities wait until closer to 165 before stepping in.

Looking ahead

• Tokyo CPI is due on Friday and is expected to rise to 1.7% year on year.
• Energy-sensitive categories, including airfares, travel, logistics and manufactured goods, are likely to face renewed upward pressure.
• The weaker yen and biannual price revisions should keep underlying inflation firm.
• GDP is expected to soften in Q2 and Q3 2026, but fiscal support should limit downside risks.
• The June BoJ meeting is now a live event, with a 25 bp hike increasingly likely.
• USDJPY remains biased higher unless the BoJ delivers a clearer tightening signal or authorities intervene more aggressively.