MUFG links Japan’s fiscal plans under PM Takaichi to a path towards gradual Bank of Japan (BoJ) policy normalisation. It says a move away from supplementary budgets and towards investment-led spending could support this shift.
MUFG expects the FY2026 budget to be passed, with the government seeking enactment by the end of the current fiscal year. It says having the budget approved and details confirmed could raise the chance of a BoJ rate increase.
Fiscal Policy And Boj Normalisation
MUFG puts the probability of a rate rise at the 28 April meeting at about 70%. It adds that if the FY2026 budget passes by then and USD/JPY stays near current levels, pressure for action could rise.
The firm notes the government may name replacements next week for two BoJ Board members, Asahi Noguchi and Junko Nakagawa. It says both are seen as dovish, and replacements could shift the Board’s balance.
MUFG notes nationwide CPI data on Friday came in weaker than expected. It says this does not, on its own, change the April hike outlook, though repeated weaker readings could affect later moves.
The government’s new focus on investment-led growth signals a Bank of Japan rate hike is becoming more likely, with the April 28th meeting as a key date. We are watching for the FY2026 budget to pass before the end of March as a final catalyst for the BoJ to act. This creates clear opportunities for traders in the coming weeks.
Trading Implications For Yen Rates And Volatility
With USD/JPY trading at elevated levels near 152.50, a rate hike would be intended to strengthen the yen. We believe traders should consider positioning for a lower USD/JPY through options or futures to capitalize on the narrowing US-Japan interest rate differential. The upcoming replacement of two dovish BoJ board members could further support this more hawkish policy direction.
We expect implied volatility in yen currency pairs to rise heading into late April. Looking back at the market reactions to policy tweaks during 2025, we saw sharp price swings, making long volatility positions like straddles attractive. This strategy allows a trader to profit from a large move in either direction following the BoJ’s announcement.
The latest January inflation data, with core CPI coming in at 1.9%, keeps pressure on the BoJ even if it was slightly below forecasts. A more critical data point will be the result of the “shunto” spring wage negotiations due in mid-March. If wage growth is strong, similar to the multi-decade highs we witnessed in 2025, an April rate hike would be almost certain.
Beyond currency, the most direct play is in the Japanese government bond (JGB) market. A rate hike will push bond yields higher and prices lower, making short positions in JGB futures a primary strategy. This reflects the market finally beginning to price out an era of ultra-loose monetary policy.
