The Bank of Japan kept the overnight call rate unchanged at 0.75% at its April 28 meeting, in a 6-3 vote. This marked the largest dissent against a hold decision in the past three years under Governor Ueda, pointing to rising internal pressure for further tightening.
The BOJ’s updated macroeconomic forecasts reinforce this tilt, suggesting inflation risks outweigh growth risks. The BOJ revised down its FY26 GDP growth forecast from 1.0% to 0.5%, while raising the FY26 core CPI forecast more sharply from 1.9% to 2.8%. Beyond FY26, projections show GDP growth recovering to 0.7% in FY27 and stabilising at 0.8% in FY28, while core CPI eases to 2.3% in FY27 and stabilises at 2.0% in FY28.
However, Governor Kazuo Ueda’s press conference struck a more cautious tone. He emphasised the need to spend more time assessing how the Middle East conflict could affect the economy and prices, without offering clear guidance on the timing of the next rate hike.
We maintain our forecast for the BOJ to raise rates by 25bps to 1.00% by July. By then, Middle East-related uncertainties should have subsided, providing greater clarity on Japan’s growth and inflation outlook. Growth is likely to prove more resilient than expected, supported by global AI-driven export demand and expanded domestic fuel subsidies underpinning consumption. Inflation is also likely to remain sticky, given steady wage growth and potential second-round effects.
A 25bps rate hike may provide only limited support to the JPY. Markets have already fully priced in such a move over the next three months. Reactions to a hike versus no hike in June/July are likely to be asymmetric. Meanwhile, the recent rise in global tech stocks has lifted risk sentiment and encouraged carry trades, which bodes ill for the JPY. Elevated energy prices also continue to weigh on the currency through a deterioration in the terms of trade.
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