The Bank of Japan has maintained its main policy rate at 0.5%, consistent with predictions. The vote was 7–2, with board members Takata and Tamura advocating for a rate increase. Takata observed a departure from deflationary trends, achieving the 2% price stability goal. Tamura argued that inflation risks lean upward, suggesting the policy rate should move toward neutral.
The economy is showing a moderate recovery with some ongoing weakness. Exports and output are relatively stable, capital expenditure shows a moderate upward trend, and private consumption remains robust. Inflation expectations have risen slightly, and while growth is expected to slow due to global trade policies, it may later accelerate. Underlying inflation is anticipated to stagnate during this slowdown but gradually increase afterwards.
Asset Sales Announced
The Bank of Japan plans to start selling its ETF and J-REIT holdings, with the decision made unanimously. These asset sales will align with established disposal principles. Further information from Bank of Japan Governor Ueda is expected at a conference scheduled for 0630 GMT / 0230 US Eastern time. Recent discussions emphasised the likelihood of keeping the interest rate steady amid global economic pressures, with a potential rate rise not expected until January 2026.
We are seeing a clear hawkish shift at the Bank of Japan, even with the on-hold decision. The two dissenting votes for a rate hike are the most important signal, telling us that momentum for tighter policy is building internally. This suggests the next move is an increase, and we should be positioning for it to happen sooner than the market previously expected.
This policy pivot is supported by inflation data that has been stubbornly high. With core inflation holding steady above 2.5% for over a year now, the dissenters’ view that the price target has been achieved is gaining credibility. This comes after the landmark ‘shunto’ wage negotiations of 2024 and 2025 delivered the biggest pay increases in over three decades, embedding inflation expectations.
Impact on Currency and Markets
The yen’s strengthening is the immediate and most logical reaction, and we expect this trend to continue. After years of weakness that saw USD/JPY push past historical highs seen back in 2023 and 2024, the tide is now turning. Traders should consider buying put options on the USD/JPY pair to profit from a further fall towards the 140 level in the coming weeks.
For equity markets, this is a headwind for the Nikkei 225. A stronger yen directly hurts the profits of Japan’s major exporters, and the start of ETF sales removes a huge, price-insensitive buyer from the market. We believe buying put options on the Nikkei is a prudent strategy to hedge against or profit from a potential downturn.
The unanimous decision to begin selling ETFs and J-REITs should not be underestimated as it marks the start of true quantitative tightening. The central bank is beginning to unwind a portfolio that was once valued at over ¥70 trillion, which will gradually reduce liquidity from the financial system. This action reinforces the bank’s commitment to policy normalization.
This outlook means we should anticipate higher Japanese government bond (JGB) yields. The prospect of a near-term rate hike and the end of massive central bank support will put upward pressure on borrowing costs. We can position for this by using interest rate derivatives that profit from a rise in long-term yields.
