BOJ Sounds Hawkish Tone on Inflation Amid Steady Interest Rates

Yesterday, Japan's central bank, the BOJ, announced that it would keep its policy rate at 1%, as expected by markets. However, what caught attention was a more hawkish tone in its quarterly outlook. The BOJ warned that 'underlying inflation' could exceed its 2% goal due to increased price and wage rises, driven by factors like AI-linked global demand and a weaker yen.

The BOJ also trimmed its core inflation forecast for the fiscal year ending March 2027 to 2.5%, down from 2.8%, citing stabilized oil prices. Yet, the overall message was that risks are tilted upward, hinting at another rate hike sooner rather than later.

This move sent shockwaves through markets, with short-dated Japanese government bond yields increasing and the yen remaining weak around 160.760 per dollar. The BOJ's $73 billion yen defense showed why its 2% warning matters more than intervention efforts to slow the yen's slide.