The Bank of Japan is expected to delay further rate hikes due to uncertainty caused by U.S. trade policy, as noted by former BOJ executive director Kenzo Yamamoto. Before the U.S.-Japan trade discussions, Yamamoto mentioned that the BOJ might adopt a “wait-and-see” approach given the vague terms of a 90-day tariff reprieve.
Japan’s economy faces risks from increased U.S. tariffs and a stronger yen, which may cause the BOJ to avoid tightening its policies soon. Yamamoto expressed concern over a recent 10% rise in the yen, which could impact export profits, business investment, and wages.
Inflation Trends and Policy Normalisation
Despite inflation exceeding 2% since 2022, the BOJ maintains a cautious pace regarding policy normalisation, as it believes the inflation trend is uncertain. Yamamoto suggested that the BOJ’s emphasis on achieving a 2% inflation target could impede necessary rate adjustments amidst a volatile global economy.
What Yamamoto conveyed aligns with what we’ve observed in the broader economic backdrop. Policymakers in Japan appear reluctant to adjust interest rates upwards, even though consumer prices have surpassed their benchmark target for some time now. The hesitation, according to him, stems from both international and domestic pressures, particularly driven by unpredictable external policy threats and currency fluctuations.
When the yen strengthens rapidly—as it has recently—it tends to reduce the competitiveness of Japan’s exports. That has a direct consequence on corporate revenues generated abroad, and if those shrink, firms naturally become less inclined to expand investment or raise pay packets at home. That results in a slower feedback loop to domestic consumption, which is what the central bank likely fears most.
The comment that the inflation trend is not fully dependable despite being above the official target resonates. For inflation to be considered durable and self-sustained, it must be backed by consistent wage growth and strong domestic demand. We haven’t quite seen that yet. The concern is not simply a sharp rise in prices, but whether such increases are backed by fundamentals that can absorb and sustain tighter monetary conditions.
From what has been suggested, any acceleration towards higher yields from the Bank of Japan would have to wait for more clarity—both from abroad and at home. One substantial reason appears to be the lack of definitive progress on trade negotiations, especially with partners imposing or threatening policy changes that could immediately alter the demand for Japanese goods.
Going forward, immediate expectations for a change in short-term rates should remain temperate. With headline inflation technically strong, one might normally anticipate more assertive steps. But this situation isn’t typical—there’s an ongoing debate between the apparent data and the undercurrents driving it. We are probably in a holding phase, waiting for a consistent pattern in domestic consumption resilience and policy clarity externally.
Market Implications and Positioning
Derivatives markets may already be reflecting this stall in monetary tightening momentum, but we should be analysing volatility metrics more carefully. Should sudden shifts in FX policy or unexpected developments related to trade policy occur, short-dated interest rate products might see positional resets. Flexibility and responsiveness will be key traits in the coming fortnight.
There is also little appetite to act based on forward-looking inflation, since that relies heavily on multiple uncertain assumptions. The use of future wage trends and firm pricing behaviour as guideposts has so far produced more caution than conviction. That will likely continue. Hence, market participants trading rate-sensitive products should not expect rapid recalibrations barring a substantial trigger.
As of now, we can infer that the weighting of external uncertainty outweighs the support from internal inflation data. This creates an environment where directional positions require tighter risk controls. A stronger yen, if it extends, would not just dampen exporters’ earnings—it would confirm the bank’s discomfort with Japanese monetary tightening in the presence of global shocks. For positioning, that matters more than headline figures.
