According to analysis, Tang Yuxuan, Head of Asia Rates and FX Strategy at JPMorgan Private Bank, stated that the latest Bank of Japan policy meeting was its first since the escalation of tensions in the Middle East. While the decision to keep interest rates unchanged was in line with expectations, the 6-3 voting split suggests a high likelihood of a rate hike by Japan in June. Nevertheless, market pricing currently anticipates approximately two rate hikes within 2026, indicating that expectations for tightening have been largely factored in. The bank believes the threshold for more than two rate hikes is high, as Japan is currently walking a tightrope of "stagflation," with elevated energy prices posing significant pressure. As one of the major economies with the lowest energy self-sufficiency rate (around 15%), Japan remains highly sensitive to external energy shocks. The government's current energy subsidy measures are costly, and when combined with other expansionary fiscal plans, they further exacerbate the burden on public finances. Against this backdrop, the Bank of Japan may need to maintain a relatively accommodative policy stance to mitigate potential demand contraction. This is also reflected in the central bank's significant downward revision of its growth forecast for the current fiscal year from 1% to 0.5%. Regarding the yen, markets will closely watch Governor Kazuo Ueda's press conference in the afternoon for any warnings about inflation risks stemming from currency weakness and potential drags on Japan's balance of payments. Although foreign exchange intervention is ultimately decided by the Ministry of Finance, maintaining credibility around the 160-162 "defense line" may be less costly than losing market confidence. However, if the Middle East conflict persists and triggers more severe and prolonged energy shocks, the credibility of maintaining stability in the foreign exchange market will face increasingly severe tests.
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