BoJ Deputy Governor Himino said the bank could raise interest rates towards a neutral level even if headline inflation falls below 2%. This would depend on whether the BoJ judges that underlying inflation is accelerating towards its price target.
He expects Japan’s consumer inflation to remain below 2% for a period of time. He said underlying inflation may accelerate moderately, while the BoJ monitors the risk that slower headline inflation could weigh on underlying inflation.
Policy Focus Shifts To Underlying Inflation
Himino said accommodative financial conditions may be one factor lifting domestic property and stock prices. He said the BoJ is watching these moves, but it does not currently view asset prices as creating risks that require a monetary policy response.
In markets, USD/JPY was up 0.46% on the day at 157.00 at the time of reporting.
Recent statements indicate we could see interest rates rise even if headline inflation dips below the 2% target. The focus is now firmly on underlying inflation trends as the key driver for policy normalization. This suggests the Bank of Japan is preparing the market for a data-dependent, but hawkish, pivot.
This view is significant as we saw the national core CPI for January 2026 dip to 1.9%, marking the first time it has fallen below the target since late 2025. The market has been questioning the pace of future hikes, so this guidance is a direct response. These comments aim to disconnect rate expectations from any single month’s headline inflation figure.
Implications For Yen Volatility And Rates
For USD/JPY, which has remained stubbornly high above 160, this creates a complex outlook. Implied volatility in yen options will likely increase as traders weigh the potential for a surprise rate hike against continued US dollar strength. Looking back, we saw similar verbal warnings precede actual currency intervention in the fall of 2025 when the pair threatened to break 168.
This environment suggests traders should consider strategies that benefit from rising volatility, such as long straddles or strangles on the yen. Buying call options on the JPY, which is equivalent to puts on USD/JPY, could be a direct play on a hawkish surprise from the central bank. The key is that the Bank of Japan is signaling its reaction function is changing, making old assumptions about their inaction obsolete.
In the interest rate market, this reinforces the case for positioning for a steeper yield curve. We should anticipate that futures contracts for 10-year Japanese Government Bonds will face downward pressure. Since the BoJ raised its policy rate to 0.10% back in July 2025, the market has been pricing in a very slow path, a path which now appears to be under review.
