BoJ board member Hajime Takata said the bank should keep raising rates, but do so slowly. He said policy normalisation should avoid market moves that go beyond the risk premium investors have already priced in.
He said overseas economies are growing at a moderate pace, though some regions are weakening. He added that Japan’s deflation risks have eased, so the BoJ should pay more attention to rising prices.
Policy Normalisation Stays Gradual
He said a sharp US-style slowdown caused by tighter credit looks unlikely. He also said Japan’s real short-term interest rates are still well below zero, even after the December rate increase.
He warned that if Japan’s policy path keeps diverging from other countries, volatility could rise—especially in foreign exchange markets. He said the BoJ is now at a point where it should consider shrinking its balance sheet and slowly reducing its purchases of Japanese government bonds (JGBs).
He said weak demand for super-long JGBs needs close monitoring, including at the June interim review of the taper plan. He added that the BoJ may need to respond flexibly—including buying JGBs—if market functioning deteriorates.
USD/JPY was 0.35% lower at 155.90. The BoJ aims for about 2% inflation and raised rates in March 2024 after years of QQE, negative rates, and yield curve control.
Implications For Traders And Markets
The Bank of Japan’s message points to continued, gradual rate hikes in the weeks ahead. Core inflation has stayed above the 2% target for most of 2025, and it was 2.6% in January 2026. That gives the central bank room to keep normalising policy.
For currency traders, this supports the case for a stronger yen. The policy gap that drove the yen lower in 2022 and 2023 is now narrowing. That makes long-yen positions—using options or forwards—look more attractive. It may make sense to position for a steady decline in USD/JPY, potentially toward 150, rather than expecting a sudden, volatile fall.
In rates markets, the easier path for JGB yields still looks higher. The 10-year JGB yield has already risen from under 1% in early 2025 to around 1.25%. Trades that benefit from higher yields, such as shorting JGB futures, may fit this trend. At the same time, the BoJ has made it clear it wants to avoid a disorderly sell-off, especially in the super-long end of the curve.
The repeated focus on avoiding “significant market volatility” is also a warning not to take overly aggressive positions. The direction may be clear, but the BoJ could step in if it thinks moves are happening too fast. That creates a risk of sharp, short-term reversals. Because of this, options strategies that cap downside risk—or that benefit from a slow, low-volatility move—may be a better fit.
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