The Bank of Japan (BoJ) is widely expected to keep interest rates unchanged at 0.75%, as there’s still limited progress on inflation and growing downside risks to the economy linked to the ongoing US-Iran conflict. The latest Tokyo CPI report showed inflation easing further in February, with core inflation slipping below the BoJ’s 2% target.
While higher energy prices could push headline inflation up in the coming months, the prolonged US-Iran war may weigh on overall economic activity. Japanese equities have already been volatile as the Nikkei dropped more than 14% after the conflict began, though it has since recovered nearly half of those losses.
Given this backdrop, the BoJ is likely to avoid tightening policy for now, as doing so could trigger another market selloff and further dampen economic activity. BoJ Governor Ueda is unlikely to offer much in terms of forward guidance and will likely reiterate that they will keep raising rates if the economic outlook is realised. The market is pricing roughly two rate hikes by year-end (42 bps of tightening) with the first one coming in June at the earliest.
Traders will also focus on comments on the Japanese yen which recently fell to a two-year low against the US dollar. In 2024, the JPY weakness played a major role in one of their rate hike decisions, so the market will be attentive to signals whether that could happen again.
