May 2026

After BOJ intervened in the currency market to support Yen and the USDJPY slid to 155.09 showing a sharp, sudden moves lower from 160 level. BOJ left rates unchanged in its April meeting, but signalled it is ready to hike rates in the face of rising inflation. BOJ is expected to hike in June. BOJ’s hiking in June will reinforce its independence.  

April 2026

Although current Japanese economy is not in stagflation with inflation remains around its target and growth still holding above potential, prolonged Middle East conflict can create rising inflation with weakening economic activities. Due to the strain of higher fuel costs put on households, price pressures are building and consumer sentiment has already begun to deteriorate. Inflation impulse is driven by external shocks rather than by strong domestic demand.

A temporary spike in costs is less likely to warrant aggressive tightening from BOJ but a sustained period of elevated energy costs can push inflation higher while eroding growth (stagflationary risk), which will require more complex policy response navigating between inflation control and economic support.

BOJ left interest rate unchanged keeping its short-term policy rate at 0.75%. Next hike is expected to come as early as June due to growing concern over energy-driven inflation caused by Iran war. Ignoring upward price pressures can exacerbate side effects coming from yen weakness which can cause higher import costs. What investors may want to see is policy normalization, a controlled withdrawal from buying long-dated JGBs which has been suppressing JGB yields. If BOJ continues its bond-buying operation, it may lose its policy credibility. Also, if BOJ does not show a clear willingness to raise interest rates, the risk is high that the yen could weaken sharply once again. BOJ is also facing the dilemma of tightening policy into an energy price shock that is not only inflationary but also growth destructive.