BOJ successfully defends 160 level for USD/JPY
The Bank of Japan decided on March 19 to leave the policy rate on hold. The official statement for the meeting indicated that the Bank maintains its tightening stance despite the heightened tensions in the Middle East, and the content was somewhat more hawkish than expected.
However, this stance was probably intended to arrest the yen’s decline and serve as a check on the Takaichi administration, which is opposed to further rate hikes. It may therefore have been slightly more hawkish than the Bank’s actual policy stance.
A similar tendency could be observed at Governor Ueda’s press conference after the meeting. There was speculation that USD/JPY might top 160 during the press briefing, but in the end, it fell back into the low 159 range as the yen strengthened against the dollar. This outcome likely reflects the market’s somewhat hawkish interpretation of Governor Ueda’s remarks, although it was not explicit. The 10-year JGB yield also rose somewhat, suggesting that the news conference may have modestly reinforced expectations of a rate hike.
However, this stance was probably intended to arrest the yen’s decline and serve as a check on the Takaichi administration, which is opposed to further rate hikes. It may therefore have been slightly more hawkish than the Bank’s actual policy stance.
A similar tendency could be observed at Governor Ueda’s press conference after the meeting. There was speculation that USD/JPY might top 160 during the press briefing, but in the end, it fell back into the low 159 range as the yen strengthened against the dollar. This outcome likely reflects the market’s somewhat hawkish interpretation of Governor Ueda’s remarks, although it was not explicit. The 10-year JGB yield also rose somewhat, suggesting that the news conference may have modestly reinforced expectations of a rate hike.
Five remarks signaling hawkish stance
Governor Ueda avoided any explicit comments regarding the future course of monetary policy and limited himself to cautious statements. At certain points, however, his remarks suggested the possibility of a rate hike and appeared designed to focus attention on the possibility of an increase in the policy rate at the April MPM. As a result, he appears to have successfully halted the decline in the yen.
First, although this was nothing new, he repeatedly noted that domestic prices have become more susceptible to the influence of exchange rate fluctuations in recent years, and that the sustained weakness in the yen was conducive to higher inflation. This was likely a prepared remark.
Second, the governor explained that, prior to the escalation of tensions in the Middle East, the Japanese economy had been in relatively good shape and was trending broadly in line with the Bank's outlook (i.e., it was "on track"). The BOJ's basic stance is that if the economy follows the path laid out in its projections, the likelihood of achieving the 2% price stability target will increase, and it will then proceed to raise rates. His remarks conveyed the impression that the Bank would have implemented a rate hike at this meeting had it not been for recent events in the Middle East.
Third, Mr. Ueda noted that the surge in crude oil prices depresses economic activity while pushing up prices. This leads to increasingly stagflationary conditions in the economy, which generally complicates a monetary policy response. However, the governor explicitly stated that even if the rise in crude oil prices weighs on economic activity, a rate hike would still be possible provided that underlying inflation was not affected.
Fourth, regarding the impact of rising crude oil prices on underlying inflation, he explained that there are two opposing effects—upside risks via the elevation of longer-term inflation expectations, and downside risks via the adverse effect on economic activity—and that Policy Board members emphasizing the upside risks seemed to be in a slight majority.
Fifth, after noting that it was probably difficult to accurately assess the effects of heightened tensions in the Middle East on economic activity and prices in a short period, a reporter questioned whether that impact would be sufficiently reflected in the results of the Tankan survey conducted at the beginning of April. Governor Ueda avoided a direct response but explained that the Bank would assess the impact based on information gleaned through surveys and interviews conducted by branch offices and other sources and would indicate in the Outlook Report whether any revisions to its existing projections for economic activity and prices were necessary. This gave the impression that a rate hike might be considered at the April MPM, when the Bank will release its next Outlook Report, in view of the results of the Tankan survey and the branch managers’ meeting.
First, although this was nothing new, he repeatedly noted that domestic prices have become more susceptible to the influence of exchange rate fluctuations in recent years, and that the sustained weakness in the yen was conducive to higher inflation. This was likely a prepared remark.
Second, the governor explained that, prior to the escalation of tensions in the Middle East, the Japanese economy had been in relatively good shape and was trending broadly in line with the Bank's outlook (i.e., it was "on track"). The BOJ's basic stance is that if the economy follows the path laid out in its projections, the likelihood of achieving the 2% price stability target will increase, and it will then proceed to raise rates. His remarks conveyed the impression that the Bank would have implemented a rate hike at this meeting had it not been for recent events in the Middle East.
Third, Mr. Ueda noted that the surge in crude oil prices depresses economic activity while pushing up prices. This leads to increasingly stagflationary conditions in the economy, which generally complicates a monetary policy response. However, the governor explicitly stated that even if the rise in crude oil prices weighs on economic activity, a rate hike would still be possible provided that underlying inflation was not affected.
Fourth, regarding the impact of rising crude oil prices on underlying inflation, he explained that there are two opposing effects—upside risks via the elevation of longer-term inflation expectations, and downside risks via the adverse effect on economic activity—and that Policy Board members emphasizing the upside risks seemed to be in a slight majority.
Fifth, after noting that it was probably difficult to accurately assess the effects of heightened tensions in the Middle East on economic activity and prices in a short period, a reporter questioned whether that impact would be sufficiently reflected in the results of the Tankan survey conducted at the beginning of April. Governor Ueda avoided a direct response but explained that the Bank would assess the impact based on information gleaned through surveys and interviews conducted by branch offices and other sources and would indicate in the Outlook Report whether any revisions to its existing projections for economic activity and prices were necessary. This gave the impression that a rate hike might be considered at the April MPM, when the Bank will release its next Outlook Report, in view of the results of the Tankan survey and the branch managers’ meeting.
BOJ likely to take wait-and-see stance for now, making early rate hike difficult
Governor Ueda said that monetary policy decisions are made at each MPM based on the information available at the time, and he provided no clear hints regarding the timing of the next rate hike. But with the remarks noted above, he appears to have encouraged rate hike expectations among market participants—and particularly the expectation of an April hike—thus successfully preventing a further decline in the yen.
However, the heightened tensions in the Middle East, the surge in crude oil prices, and concerns over crude oil supplies are causing major disruptions to corporate activity and consumer behavior. In addition to monitoring future developments in the Middle East, a considerable amount of time will probably be needed to assess the impact of events up to now on economic activity and prices.
The standard central bank response to a supply shock such as a surge in crude oil prices is to adopt a wait-and-see stance. Some central banks might consider an early rate hike if the supply shock were to arise in an environment where inflationary risks were already elevated due to strong demand or other factors. But that is not the case in Japan.
Since the BOJ intends to assess the impact of the Middle East situation by taking into account not only economic data released with a lag but also information from companies obtained through the Tankan survey and branch managers’ meetings, the July MPM would seem a more appropriate time to conduct such an assessment than the April meeting, when the available information will probably be insufficient to come to a definitive conclusion.
For these reasons, I continue to expect the BOJ’s next rate hike will take place in July or later—that is, sometime in the second half of 2026.
However, the heightened tensions in the Middle East, the surge in crude oil prices, and concerns over crude oil supplies are causing major disruptions to corporate activity and consumer behavior. In addition to monitoring future developments in the Middle East, a considerable amount of time will probably be needed to assess the impact of events up to now on economic activity and prices.
The standard central bank response to a supply shock such as a surge in crude oil prices is to adopt a wait-and-see stance. Some central banks might consider an early rate hike if the supply shock were to arise in an environment where inflationary risks were already elevated due to strong demand or other factors. But that is not the case in Japan.
Since the BOJ intends to assess the impact of the Middle East situation by taking into account not only economic data released with a lag but also information from companies obtained through the Tankan survey and branch managers’ meetings, the July MPM would seem a more appropriate time to conduct such an assessment than the April meeting, when the available information will probably be insufficient to come to a definitive conclusion.
For these reasons, I continue to expect the BOJ’s next rate hike will take place in July or later—that is, sometime in the second half of 2026.
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Takahide KiuchiPortraits of Takahide Kiuchi
Executive Economist
Takahide Kiuchi started his career as an economist in 1987, as he joined Nomura Research Institute. His first assignment was research and forecast of Japanese economy. In 1990, he joined Nomura Research Institute Deutschland as an economist of German and European economy. In 1996, he started covering US economy in New York Office. He transferred to Nomura Securities in 2004, and four years later, he was assigned to Head of Economic Research Department and Chief Economist in 2007. He was in charge of Japanese Economy in Global Research Team. In 2012, He was nominated by Cabinet and approved by Diet as Member of the Policy Board, the committee of the highest decision making in Bank of Japan. He implemented decisions on the Bank’s important policies and operations including monetary policy for five years.
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