Bank of Japan Policy Rate Commentary: Rate Hike May Be Less Than Expected, But It Won’t Alter the Yen’s Upward Trend

TradingKey
Updated
Mitrade
coverImg
Source: DepositPhotos

On 19 March 2025, the Bank of Japan (BoJ) announced its March interest rate decision. In line with widespread market expectations, the central bank kept its policy rate unchanged at 0.5%. This decision reflects caution amid Japan’s moderate economic recovery and modest inflation growth, overshadowed by external uncertainties—most notably Trump’s tariff policies—which have made the BoJ’s path to monetary normalization more tentative. The central bank’s stance remained neutral. Governor Kazuo Ueda noted that the upward trend in wage growth is encouraging, but rising inflation and uncertainties surrounding U.S. foreign policy could pose risks to the economy. He reiterated that rate hikes would continue if economic data aligns with expectations.


Looking ahead, we expect the BoJ to maintain its broader trajectory toward rate hikes, though a cautious approach will remain the cornerstone of its monetary policy. On the growth front, after experiencing negative growth in the first half of last year, Japan’s economy has been recovering since the second half (Figure 1), supported by low interest rates—significantly below those of other developed economies. This recovery provides a feasible foundation for further rate increases.


Figure 1: Japan's real GDP growth (y-o-y, %)

altText

Source: Refinitiv, Tradingkey.com


On the inflation front, elevated food prices—particularly rice (Figure 2)—combined with persistent labour market tightness have driven a recent rebound in both Headline CPI and Core CPI (excluding fresh food) from their lows (Figure 3). Additionally, the “Shunto” spring wage negotiations have shown slightly stronger wage growth. This wage-inflation spiral creates a necessary condition for sustained rate hikes.


Figure 2: Japan food CPI (%)

altText

Source: Refinitiv, Tradingkey.com


Figure 3: Japan CPI (%)

altText

Source: Refinitiv, Tradingkey.com


However, external factors will limit the BoJ’s ability to raise rates aggressively. Following the implementation of U.S. tariff policies on 2 April, any tariffs imposed on Japan would directly slow its economic growth. Even if the direct tariff impact is modest, a trade war’s broader suppression of global growth would indirectly affect Japan, an export-oriented economy.


Moreover, retaliatory measures from trading partners are expected to further decelerate U.S. economic growth. This could prompt the Federal Reserve to restart its rate-cutting cycle, with cuts potentially exceeding current market expectations. In turn, this would slow the BoJ’s monetary policy normalization.


In summary, under the dual forces of supporting and constraining rate hikes, we anticipate the BoJ will raise rates once by 25 basis points by year-end—fewer than the market’s expected two hikes. Nevertheless, against a backdrop of widespread rate cuts by other global central banks, the BoJ’s tightening is likely to bolster the yen’s exchange rate (Figure 4).


Figure 4: USD/JPY

altText

Source: Refinitiv, Tradingkey.com

* The content presented above, whether from a third party or not, is considered as general advice only.  This article should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments.

goTop
quote
Do you find this article useful?
Related Articles
placeholder
Japanese Yen rebounds from multi-week low against USD; lacks bullish convictionThe Japanese Yen (JPY) recovers slightly from a four-week low touched against a broadly stronger US Dollar (USD) during the Asian session on Friday, though it lacks any follow-through buying.
Author  FXStreet
1 hour ago
The Japanese Yen (JPY) recovers slightly from a four-week low touched against a broadly stronger US Dollar (USD) during the Asian session on Friday, though it lacks any follow-through buying.
placeholder
NZD/USD breaks below 0.5900, remains subdued following China’s trade dataThe NZD/USD pair continues its downward trajectory for the third consecutive session, hovering near 0.5890 during Friday's Asian trading hours. The decline follows the release of China's latest trade data, which pointed to a slowdown in external demand.
Author  FXStreet
1 hour ago
The NZD/USD pair continues its downward trajectory for the third consecutive session, hovering near 0.5890 during Friday's Asian trading hours. The decline follows the release of China's latest trade data, which pointed to a slowdown in external demand.
placeholder
EUR/USD rebounds above 1.1200, downside remains due to improved US DollarThe EUR/USD pair trimmed daily losses and is trading around 1.1230 during Friday's Asian session. The pair depreciated as the US Dollar (USD) found support from upbeat US economic data and signs of easing trade tensions.
Author  FXStreet
1 hour ago
The EUR/USD pair trimmed daily losses and is trading around 1.1230 during Friday's Asian session. The pair depreciated as the US Dollar (USD) found support from upbeat US economic data and signs of easing trade tensions.
placeholder
USD/CAD climbs to multi-week top, closer to mid-1.3900s amid sustained USD buyingThe USD/CAD pair is seen building on this week's recovery from the year-to-date low, around mid-1.3700s, and gaining positive traction for the third successive day on Friday.
Author  FXStreet
4 hours ago
The USD/CAD pair is seen building on this week's recovery from the year-to-date low, around mid-1.3700s, and gaining positive traction for the third successive day on Friday.
placeholder
EUR/USD fumbles again as trade deal hopes bolster Greenback bidsEUR/USD trimmed into the low end on Thursday, shedding a little over two-thirds of one percent from the day’s opening bids after US Dollar (USD) bids caught a broad-market boost following the tentative announcement of a pending trade deal between the United States (US) and the United Kingdom (UK).
Author  FXStreet
5 hours ago
EUR/USD trimmed into the low end on Thursday, shedding a little over two-thirds of one percent from the day’s opening bids after US Dollar (USD) bids caught a broad-market boost following the tentative announcement of a pending trade deal between the United States (US) and the United Kingdom (UK).
Real-time Quote