The Bank of Japan follows the Federal Reserve's "wait-and-see" approach, but key wording raises the probability of a rate hike in April.

Shortly after the Federal Reserve announced that it would keep its monetary policy unchanged, the Bank of Japan, as expected by the market, decided to maintain its policy interest rate unchanged. This is mainly due to a series of significant uncertainties related to a new round of geopolitical conflicts in the Middle East, which have cast a shadow over the economic growth prospects. At the same time, the Bank of Japan also promised in its latest statement that if its price growth forecast is realized, it will quickly raise borrowing costs. The yen exchange rate (USD/JPY benchmark) did not change significantly after the Bank of Japan's interest rate decision, but analysts are still focusing on whether the USD/JPY will break above the key level of 160 in the near term, and the possibility of Japanese government intervention in the foreign exchange market after breaking through the 160 key psychological level. Overall, the Bank of Japan maintained its stance as expected, but did not give up on the path to further rate hikes; the oil price shock caused by the Middle East geopolitical conflict is escalating the inflation risk in Japan, and this inflation effect of energy costs may become a key factor for the Bank of Japan to return to the rate hike process in April. According to a recent statement, the Bank of Japan, at the end of a two-day meeting on Thursday, kept the benchmark interest rate unchanged at 0.75%. This result was in line with economists' expectations. The Bank of Japan made this decision with a vote of 8-1, with hawkish representative Satoshi Takada voting against for the second consecutive meeting, in favor of a rate hike. After the statement was released, the Nikkei 225 index extended its losses, while the yen remained relatively stable. The Iran war has put the Bank of Japan in a delicate position. The rapid rise in oil prices is expected to increase inflation, and the inflation effect of higher energy costs could put significant pressure on business activities and Japan's fragile consumer spending system, which is still in the process of recovery. The Bank of Japan avoided sending strong dovish signals, and subtle changes in wording are leading the market to speculate about a rate hike in April. The Bank of Japan mentioned in the statement the uncertainty related to the Iran war and its impact. The statement stated, "Risks to the economic growth outlook include the future direction of the Middle East situation and the trend of crude oil prices." The statement also added that the only member who dissented, Satoshi Takada, pointed out that due to the potential second-round effects of overseas events driving up prices, Japan's price risks are skewed to the upside. Meanwhile, the Bank of Japan reiterated its view that in the latter half of the current outlook period, price trends will remain consistent with its target; if its price outlook is realized, the Monetary Policy Committee intends to announce another increase in the benchmark interest rate. Normally, when the Bank of Japan keeps its policy settings unchanged, it omits related wording and expressions about its commitment to further rate hikes in its policy statement. Including this in the statement on Thursday may indicate that the Bank hopes to avoid sending overly dovish signals to prevent further depreciation of the yen. "We believe that the Monetary Policy Committee of the Bank of Japan will judge that taking action now would demonstrate the limited room for maneuver in fulfilling its commitment to price stability, and Governor Haruhiko Kuroda may suggest that a rate hike in April is a possibility," said senior economist Takaro Kimura from Bloomberg Economics. Chief strategist Hirohisa Hanno from T&D Asset Management Company said that the Bank of Japan's description of the impact of oil prices on core CPI implies that even a new round of cost-push inflation caused by rising oil prices could be a reason for a rate hike, opening the door for a return to rate hikes in April. Bank of Japan Governor Haruhiko Kuroda is scheduled to hold a press conference at 3:30 pm Tokyo time, where he will further explain this decision and his views on the interest rate path. Foreign exchange traders will remain vigilant, as detailed explanations of maintaining policy unchanged in the past have sometimes led to pressure on the yen to depreciate. Japan is one of the major economies most vulnerable to the impact of tensions in the Middle East, with over 90% of its oil imports coming from the region. According to a report by the government on Wednesday, gasoline prices in Japan reached a record high of 190.8 yen per liter this week, the highest level since 1990. Japanese Prime Minister Sanae Takichi, who won a landslide victory in the national election last month with a promise to firmly address the cost of living crisis as a core platform, has reinstated gasoline subsidies. The Prime Minister is scheduled to meet with President Donald Trump at the White House on Thursday, her first visit to the United States since taking office. The challenge facing officials at the Bank of Japan is that higher-than-expected inflation is solidifying, with price increases exceeding the Bank's long-term anchoring target of 2% for four consecutive years. During the global supply chain disruptions caused by the COVID-19 pandemic, the Bank of Japan did not face this issue, as the deeply ingrained deflationary mindset among the Japanese public under the long-term negative interest rate policy led to relatively short-lived periods of price hikes. As shown in the chart above, inflation expectations for Japanese businesses have risen significantly. Middle East geopolitical tensions disrupt central bank monetary policy expectations As global central banks shift towards tightening policies amid rising international oil prices causing inflation and even stagflation expectations to rise sharply, central bank policymakers are closely monitoring elevated price levels. The Reserve Bank of Australia announced an interest rate hike earlier this week; the Federal Reserve, on Thursday morning Beijing time, maintained its policy unchanged, with the potential for one rate cut later this year. According to pricing in the overnight swap market, the European Central Bank has a probability of about 77% of announcing a rate hike in June. Federal Reserve Chairman Jerome Powell emphasized at a press conference on Wednesday that it is still too early to assess the impact of rising oil prices on the U.S. economy, despite financial markets quickly incorporating higher inflation expectations for the year ahead. Instead, he focused on the fact that price pressures have persisted longer than policy makers had hoped for, even before the outbreak of the Iran war. Until the Israeli and U.S. attacks on Iran on February 28, the overall trend of Japan's economy and inflation was in line with the outlook of the Bank of Japan. Economic growth in the last quarter of 2025 exceeded the government's initial estimates, and real wages in Japan turned positive in January for the first time since 2024, helped by a drop in food prices cooling inflation. Insiders said earlier this month that the duration of the ongoing Middle East geopolitical conflict was seen as a key variable in assessing Japan's economic outlook and interest rate path before Thursday's decision. Robust economic data in recent weeks, coupled with a weak yen, have led to more than one-third of Bank of Japan observers predicting another rate hike in April. Market participants believe the probability of a rate hike is even higher, with pricing in the overnight swap market indicating a probability of about 60% for action next month. Tetsuya Inoue, Senior Chief Researcher at Nomura Securities Comprehensive Research Institute, said, "The key issue during Governor Kuroda's press conference is whether the economy and prices are still on track despite excluding these external factors. If the impact of the Middle East situation proves to be temporary, there is reason to expect that the narrative of rate hikes may come back into focus." The Bank of Japan's decision to keep policy unchanged has once again brought the "yen 160 warning line" back into focus in the foreign exchange market Japanese Finance Minister Mitsuki Katayama said on Monday that with the yen against the U.S. dollar weakening significantly under continued tensions in the Middle East, and approaching a very crucial threshold - the 160 yen level for the USD/JPY, Japan's financial authorities are prepared to take decisive measures to deal with exchange rate market volatility when necessary. The new round of geopolitical tensions in the Middle East is pushing the yen exchange rate back towards the highest level since July 2024 and the crucial psychological level of 160 yen per dollar - a level that has been seen as a trigger threshold for Japan's financial authorities to intervene in the yen exchange rate. As of early Asian trading, the yen exchange rate was hovering around 159.65 yen per dollar. However, with the rising oil prices putting immense pressure on inflation and economic growth prospects in Japan, which heavily relies on Middle Eastern oil, and with global safe-haven buying of the dollar continuing under the conflict in the Middle East, the scope for Japan's finance ministry to intervene in the exchange market is likely much less effective than in the past. Unlike in 2022 and 2024 - when Tokyo swiftly intervened in the forex market, mainly to address the continuous selling of the yen caused by speculators using the increasingly wide interest rate differentials between the U.S. and Japan for carry trades, and the effect of boosting the exchange rate was relatively positive - the recent breach of the 159 key level by the yen exchange rate is more due to market's strong demand for the dollar as a safe haven, and concerns that rising oil prices could damage Japan's economy, which is already in a fragile recovery. Renjin Maruyama, foreign exchange and interest rate strategist at SMBC Nikko Securities, said, "I think it's possible for the USD/JPY to rise to 160, but I don't think it will stay significantly above there for long. As Katayama has taken a strong verbal intervention stance, traders are probably not willing to hold positions over the three-day holiday." "I think the likelihood of actual intervention action is low, but investors cannot be completely at ease. If even after the USD/JPY breaks through 160, the authorities still only resort to verbal intervention, then the USD/JPY is likely to continue to rise." Eugenia Fabon Victorino, Head of Asia Strategy at SEB, said, "The Bank of Japan's description of risks related to war focuses more on its impact on inflation rather than on negative effects on economic growth. In fact, the policy guidance-related statements have not changed significantly." "At the moment, the performance of the USD/JPY is relatively stable. However, if Governor Kuroda's later speech leans dovish, the USD/JPY is likely to receive buying support. The market still respects the psychological threshold of 160. But the appreciation of this currency pair actually reflects the worsening trade conditions in Japan and the deterioration of the Japanese economy, rather than speculative volatility against the yen itself." Yojiro Goto, Chief Foreign Exchange Strategist at Nomura Securities, said, "Although there are new statements about the Middle East situation and oil prices in the statement, these were within expectations and the basic scenario has not changed. There is no need to rush to adjust one's judgment at the moment." "Since Finance Minister Katayama has taken a quite hawkish stance, this has eliminated the immediate catalyst to test the upside of the USD/JPY. The overall outcome of this meeting was neutral, and the focus now is on whether Governor Kuroda will emphasize a dovish or hawkish inclination during the press conference."